tax-2018

Taxation of Individuals Simplified
2018
Taxation of Individuals Simplified
2018
Kerry de Hart
Sharon Smulders
Edna Hamel
Lee-Ann Steenkamp
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ISBN 978 0 409 12888 8
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First Edition 2008 Sixth Edition 2013

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Editor: Mandy Jonck
Technical Editor: Maggie Talanda

Foreword
This textbook has been written with the first year/first time Income Tax student in mind. It therefore
makes use of simple language. The unique aspects of the book are the use of flow charts to visually
explain some of the more complicated aspects of taxation, the inclusion of a glossary, and the
reproductions of the actual forms that are required by SARS. This makes for a very practical
application of the theory being taught.
The book covers all the topics needed by a taxpayer who is required to fill in an IT12 tax return,
which means that it will not only be valuable to Income Tax students, but also to the ‘man on the
street’ who wishes to understand and learn more about his taxable income calculation. The benefit of
working through the book is that taxpayers will know what is expected of them during the income tax
assessment process and will be able to verify their income tax calculations.
All examples and practical application questions in the book relate to the year of assessment from
1 March 2017 to 28 February 2018 (the 2018 year of assessment). Unless indicated otherwise, all
dates fall into the aforementioned tax year.
This edition is the seventh edition of Taxation of Individuals Simplified and it is up to date as of the
end of October 2017. All legislative amendments promulgated (and those in draft form) before the
end of October 2017 have been included in the book.
The authors would like to thank all those who supported them and who helped in the preparation of
this book.
Kerry de Hart
Sharon Smulders
Edna Hamel
Lee-Ann Steenkamp
v
Contents
Page
Chapter 1: Introduction to Governmental Fiscal Framework ........................................................ 1
Chapter 2: Introduction to the Annual Income Tax Framework .................................................... 23
Chapter 3: Calculating Taxable Income ....................................................................................... 59
Chapter 4: Gross Income, Specific Inclusions and Exempt Income ........................................... 73
Chapter 5: General, Prohibited and Specific Deductions ............................................................ 99
Chapter 6: Calculating the Taxable Income of a Person receiving a Salary, Fringe Benefits
and Other Income ....................................................................................................... 117
Chapter 7: Capital Transfer Taxes ................................................................................................ 153
Chapter 8: Prepaid Taxes ............................................................................................................. 201
Chapter 9: Other Taxes................................................................................................................. 231
Solutions to ‘Test your knowledge’ Questions & Examples ............................................................ 293
Schedules ........................................................................................................................................ 323
Glossary........................................................................................................................................... 337
Index ................................................................................................................................................ 341
vii
CHAPTER
1 Introduction to the Governmental

Fiscal Framework
Author: K de Hart
Contents
Page
1.1 Introduction ........................................................................................................................... 2
1.2 The National Budget ............................................................................................................. 3
1.3 Drafting the budget ............................................................................................................... 5
1.4 Legislating the budget .......................................................................................................... 8
1.5 The Income Tax Act 58 of 1962 (as amended) .................................................................... 9
1.6 The Tax Administration Act 28 of 2011 (as amended) ......................................................... 10
1.6.1 The Tax Ombud ........................................................................................................ 11
1.7 The South African Revenue Service ..................................................................................... 11
1.8 General aspects of taxation .................................................................................................. 14
1.8.1 Basis of taxation ........................................................................................................ 14
1.8.2 Types of taxation ....................................................................................................... 14
1.9 Order of authority and interpretation of tax law .................................................................... 15
1.9.1 Interpretation rules .................................................................................................... 15
1.9.2 Dispute resolution between SARS and taxpayers .................................................... 16
1.10 Summary ............................................................................................................................... 21
1.11 Test your knowledge ............................................................................................................. 22
1
2 Taxation of Individuals Simplified
OUTCOMES OF THIS CHAPTER
After studying this chapter, the reader should be able to

9 understand the purpose of and need for a national budget.
9 understand the process of planning and legislating the National Budget of South Africa.
9 understand the importance and impact of the Income Tax Act 58 of 1962 (the Income Tax Act)
and the Tax Administration Act 28 of 2011 on individuals.
9 understand the purpose of the South African Revenue Service (SARS).
9 understand the general aspects of taxation.
9 identify the different types of tax in South Africa.
9 understand the Alternative Dispute Resolution (ADR) process.
9 understand the correct procedure to resolve a legal and service delivery dispute with SARS.
9 explain the order of authority and the hierarchy of the South African courts.
1.1 Introduction
The government is responsible for the safety and well-being of its citizens. In order to achieve these
important responsibilities, the government needs money, which it obtains by means of levying taxes.
SARS levies the following types of tax (amongst others) in South Africa:
• income tax (including capital gains tax and withholding taxes, e.g. dividends tax)
• value-added tax (VAT)
• estate duty
• donations tax
• turnover tax (alternative regime of tax for micro-businesses)
• excise duty
• customs duty
• transfer duty
• air passenger tax
• diamond export levy
• mineral and petroleum royalties
• tax on retirement funds
• Unemployment Insurance Fund (UIF)
• VHFXULWLHVWUDQVIHUWD[
• skills development levy (SDL)
The purpose of this book is to cover the concepts that a person who earns income from employment,
investments and other smaller pursuits, needs to know about in order to understand the requirements
of the income tax laws of South Africa. After studying this book, the reader should be able to com-
plete an ITR12 income tax return for individuals and understand the consequences of the different
types of income and deductions applicable to individuals.
In order to understand these concepts, it is very important to have a firm foundation. A starting point
for obtaining an understanding of taxation is to be familiar with the process followed in South Africa to
bring about taxation in general, and the annual process that brings about specific changes to the
Income Tax Act.
Chapter 1: Introduction to the Governmental Fiscal Framework 3
This chapter will look at the government’s budgeting process in general, how it plans its expenditure,
and the consequent revenue that it needs to collect to cover its expenditure. It will also examine how
this process of budgeting affects South African individuals in the form of income tax. Further to this,
the chapter will also give an outline of the framework for calculating taxable income and tax liability.
The following concepts will be dealt with in this chapter:

J The National Budget J Taxes administered by SARS
J The Income Tax Act J Alternative Dispute Resolution process
J South African Revenue Service J Interpretation and practice notes
One should start by examining the process that the government’s financial sphere goes through in
order to plan for expenditure and revenue.
1.2 The National Budget

Accounting systems usually run over a period of a year. The accounting year of the South African
government runs from 1 April to 31 March, which the government calls the fiscal year.
The fiscal year differs from a tax year. A tax year for an individual is called a year of
assessment, and runs from 1 March to 28/9 February.
Planning is important in order to keep an organisation operational. Therefore, a good accounting

system must first plan for its needs in terms of income and expenses. Just as individuals need to plan
how they are going to spend their salary each month, the government also needs to plan its expendi-
ture. In the case of the government, it must first plan how much money it needs to spend on public
services such as health, social welfare, education, the police and the defence force. The following
steps take place when the government plans how to get the required money to finance the expendi-
ture.
In February of each year, the Minister of Finance announces the government’s spending, tax and
borrowing plans for the next three years, which the government calls the National Budget. It
describes how the government will raise money and how it will spend that money. The National
Budget divides the money between national departments, provinces and municipalities. It explains
how much money South Africa is going to spend on public services; it also announces the taxes that
government will be imposing to pay for these services.
The two diagrams that follow are taken from 2017 Budget People’s Guide. They indicate where the
government will get the money it spends, and how it plans to spend the revenue.
Figure 1.1: Where the money comes from

Figure 1.2: How the money will be spent
The full document is available at http://www.treasury.gov.za/documents/national%20budget/2017/

guides/2017%20People's%20Guide%20English.pdf. In the past, the government used to plan for its
income and spending only one year in advance. This made it difficult to plan for South Africa’s future;
therefore, the government now estimates spending for the next three years. The government calls
these three-year spending plans the Medium Term Expenditure Framework (MTEF). Both national
and provincial governments must plan for their spending.
The context of the Medium-Term Expenditure Framework (MTEF), which details three-year rolling
expenditure and revenue plans for national and provincial departments, is used to formulate all
budgets. During October each year the Minister of finance presents a Medium-Term Budget Speech
where he presents the Medium-Term Budget Policy Statement. The MTEF budget process design
matches the overall resource envelope, estimated through top-down macro-economic and fiscal
policy processes, with the bottom-up estimation of the current and medium-term cost of the existing
departmental plans and expenditure programmes.
The government develops budgets within the political priorities, as clearly spelt out in the Medium
Term Strategic Framework, the Programme of Action, the Accelerated Shared Growth Initiative (Asgi-
SA), the National Development Plan (NDP) and the Joint Initiative on Priority Skills Acquisition (JIPSA).
On Budget Day (usually in the third week in February), the Minister of Finance presents the govern-
ment’s three-year spending plans, as well as an estimate of taxes for the coming year. The Minister
also presents the Division of Revenue Bill to Parliament, setting out how spending is to be divided
between the national, provincial and local governments.
The division of revenue and the budget process allow government to:
• revise its policy priorities, macro-economic framework and resources;
• allocate available resources between the three spheres of government in line with its policy
priorities;
• involve role-players who provide technical advice when faced with trade-offs between competing
spending priorities; and
• obtain the required authority from Parliament and provincial legislatures to divide revenue and
spend it in accordance with the relevant budgets.
Just like individuals or businesses, if the government spends more than it earns (usually referred to
as the budget deficit), it must borrow the extra money required and pay interest on the borrowed
money; therefore, the government should not borrow too much money.
The budgetary cycle in any country can be divided into four different stages:
• Stage 1 – Drafting the budget
• Stage 2 – Legislating the budget
• Stage 3 – Carrying out the budget
• Stage 4 – Audit
The first two stages will be discussed in the following paragraphs.
1.3 Drafting the budget

Stage one of the budgetary cycle is the drafting of the National Budget.
The budgeting process is about deciding and agreeing on the best allocation of scarce resources to
fund the government’s many social, economic and political goals. This is achieved by means of two
parallel and linked processes: a policy prioritisation process that describes what needs to be done,
and a budget review process that describes the available resources.
The budget process begins during April about a year before the fiscal year for which the government
is planning (e.g. the budget process for the 2017/2018 fiscal year started during April 2016). It
is important to note that this process does not end on 1 April 2018. Parliament only approves the
budget legislation after the financial year has already started.
Stage one of the budgetary cycle is sub-divided into eight stages:

• Stage 1 – The Fiscal Framework and policy prioritisation
• Stage 2 – National and provincial inputs
• Stage 3 – Review of the macro-economic and fiscal framework and the division of
revenue
• Stage 4 – Combining national and provincial MTEFs
• Stage 5 – Budget Council recommendations
• Stage 6 – Extended Cabinet discussion
• Stage 7 – Finalising national and provincial MTEFs
• Stage 8 – Compiling budget documents
Stage One: The Fiscal Framework and policy prioritisation

The Minister of Finance develops a medium-term (three-year) framework between January and
March.
The process of policy prioritisation begins 18 months before the start of the financial year, with the
preparation of the Medium-Term Strategic Framework (MTSF). The MTSF forms the basis for the
President’s State of the Nation address in February each year. In this speech, the President spells out
the government’s priorities in the short- and medium-term. The short-term priorities should refer to
objectives that the government has already allocated funds for in the upcoming budget. The medium-
term priorities are ones that will inform the budget drafting process for the following year’s budget.
Working within the framework of the MTSF, the Minister’s Committee on the Budget (MinComBud)
develops a set of Medium-Term Policy Priorities for national government. These priorities will guide
national departments when preparing the first draft of their strategic plans for the new budget cycle.
Similarly, in the provinces, the executive committees (or a subcommittee) set provincial priorities to
guide the provincial departments’ strategic planning.
Stage Two: National and provincial inputs

The review of the medium-term priorities by the MinComBud and Budget Council takes place in May,
June and July – these priorities are refined each time, and the feasibility assessed. In addition, exten-
sive technical consultations are held between the national and provincial treasuries, and between
national and provincial departments – particularly in the case of concurrent functions. These latter
meetings are referred to as 10X10s or 4X4s, because of the number of national and provincial de-
partment participants. These technical meetings are often mirrored by HeadCom and MinMECs for
the different functions where policy decisions are made on different priorities.
Towards the end of May, national departments submit their three-year budget submissions to the
Department of State Expenditure. The appropriate Minister needs to approve these submissions
before submission thereof to the Department of State Expenditure.
National Treasury
Provincial departments submit their budget planning to their own treasuries, making use of provincial
guidelines on planning and budgeting. The provincial treasuries evaluate the inputs and generate
initial draft provincial MTEFs for the provincial Executive Councils, and forward these to the National
Treasury in July.
Stage Three: Review of the macro-economic and fiscal framework and the division of revenue
This stage overlaps with stage two (national and provincial inputs).
The Medium-Term Policy Priorities and draft MTEFs are key inputs into the review of the macro-
economic and fiscal framework and the division of revenue process. The MTEF proposals from
national departments must include details of existing and possible new conditional grants to provin-
cial and local governments. These details need to be taken into consideration in the process of
determining the equitable division of revenue among the three spheres of government.
During September, the Budget Council, MinComBud and Budget Forums recommend the Division of
Revenue, based on the June economic data, to the Extended Cabinet.
First, they divide the total revenue to make provision for the payment of interest on debt, as well as
provision for a contingency fund.
Then, they divide the balance of the total revenue between provincial and national government,
followed by the division of the provincial revenue among the provinces.
Stage Four: Combining national and provincial MTEFs

From July to September, this stage of the process combines the national and provincial MTEFs to
produce an MTEF for the country as a whole. If needed, the Department of State Expenditure negoti-
ates with the national spending agencies to adjust their budgets in line with the allocations by the
Department of State Expenditure. The MTEF committee checks the revised submissions against the
criteria for suggesting these adjustments.
During early September, the committee on the budget of the Minister of Finance identifies the prior-
ities that Cabinet has to approve during September. MTEF teams develop expenditure models for the
five major spending areas, namely defence, the criminal justice system, education, health and wel-
fare. The MTEF committee presents its recommendations to the Minister of Finance, the committee on
the budget of the Minister of Finance, and the Budget Council. The Cabinet then approves the draft
national MTEF during October or November.
Following the tabling of the MTBPS (Medium-Term Budget Policy Statement), National Treasury will
issue ‘pre-final allocations’ to the provinces, detailing their equitable share from the division of reve-
nue, and their share of conditional grants. Based on these allocations, provincial treasuries will hold a
second round of MTEC hearings before the final allocations to provincial departments are made in
mid-December.
Following the presentation of the national MTEF allocations to MinComBud in mid-October, final
recommendations are presented to Cabinet for approval in early November. Cabinet’s decision on
changes to the MTEF allocations of national votes are set out in ‘pre-final allocation’ letters to
departments in mid-November. These letters detail the rationale and conditions of the allocations to
national votes for the new MTEF period.
Stage Five: Budget Council recommendations

The submission of the draft combined MTEF to the Budget Council follows in
stage five. The Budget Council makes recommendations to an extended
Budget Council regarding allocations to national departments and provinces.
Stage Six: Extended Cabinet discussion

In November, the extended Cabinet approves the allocations for spending.
The Cabinet discusses the various options in order to determine
what trade-offs are needed to balance the budget within the available re-
sources.
This stage also oversees the possible publication of the draft national MTEF
for parliamentary and public debate and comment.
Figure 1.3: The cover page of a typical printed budget speech
Stage Seven: Finalising national and provincial MTEFs

The MTEFs of all the sectors of government are finalised, considered by the Budget Council and
given final approval by the Cabinet in February.
Stage Eight: Compiling budget documents

Final documents are submitted to the Department of State Expenditure by the national departments in
January, and the provinces in February. The Minister of Finance makes the Budget Speech during
the third week of February, and tables the Printed Estimates of Expenditure (known as the ‘White
Book’). Shortly thereafter, the Members of Executive Council (MECs) for finance table the provincial
budgets in the nine provincial legislatures.
January–March
Setting policies, estimating reve-
nue and setting an upper limit on
spending Finance
March–April March–May
Portfolio committees and provincial standing
committees hold hearings and report to Departments estimate their expenditure and submit
legislators. The legislature then votes on the Bill draft expenditure applications.
and the budget is passed.
February May–June
The national budget is presented to
Parliament in late February. The budget is referred Guideline estimations are determined for
to as the Appropriation Bill and the departmental vertical and horizontal allocations
allocation as ‘votes’.
January June–August
Departmental estimates are combined into one
Final stamp of approval sum and matched with Budget Council’s
allocation
November–December September–October
A draft, overall MTEF is finalised and a
Medium Term Budget Policy Statement is Everyone has a last say
published
Figure 1.4: Visual summary of the budget process

Figure 1.5: How the budget is put together
1.4 Legislating the budget

This phase makes the budget legal in the form of legislation (an Act of Parliament). During this phase,
the focus is exclusively on the current year’s budget. On Budget Day in February, the Minister
of Finance delivers the Budget Speech to the National Assembly and formally tables the national
budget in Parliament. The National Treasury publishes two key documents, namely the Estimate of
National Expenditure, and the Budget Review. They present the National Budget as two pieces of
legislation:
1. The Division of Revenue Bill
This Bill, accompanied by a memorandum that explains why the Minister of Finance has made
certain decisions, explains the division of revenue between the spheres of the government and
the nine provinces of South Africa. In this memorandum, the Minister of Finance, by law, must
respond to the recommendations of the Financial and Fiscal Commission (FFC), and state rea-
sons for the adoption or rejection of the recommendations.
2. The Appropriation Bill
This legislation gives the state departments the legal authority to spend the money assigned to
them.
In terms of section 77 of the Constitution of the Republic of South Africa, 1996, the Minister of Finance
is the only person allowed to introduce money bills into Parliament.
Section 213(2) of the Constitution determines (among other things) that departments may
only withdraw money from the National Revenue Fund in terms of an appropriation by an
Act of Parliament. The Appropriation Act is, therefore, the legal framework for depart-
ments to obtain funds from the National Revenue Fund to finance their activities.
The Appropriation Act contains the information on the expenditure of all national depart-
ments at programme level. It also includes short descriptions of the aims of the depart-
ments and their programmes. In addition to the allocations per department and pro-
gramme, the Appropriation Act also divides expenditure between current and capital
expenditure, as well as transfers.
The Appropriation Bill is a money bill, but the Division of Revenue Bill is not a money bill. A Money Bill
allocates public money to be spent for a particular purpose or it imposes taxes, levies or duties. A
Money Bill can only be introduced by the Minister of Finance and it must be introduced in the Nation-
al Assembly. In terms of the Money Bill Amendment Procedure and Related Matters Act introduced in
2009, the Appropriation Bill can be debated and amended by Parliament. Once the National Assem-
bly and the National Council of Provinces have passed the Bill, it goes to the State President who will
either sign it, or refer it back to the National Assembly.
The Budget process starts with a three- to four-month process of review in both the national and
provincial legislatures prior to the Budget Speech by the Minister of Finance. After debate by Parlia-
ment and referral to the Standing Committee on Finance for comment, the draft taxation Bills are
presented to the State President for signature, after which final promulgation as an Act of Parliament
follows on publication in the Government Gazette. The result is that the amended legislation, as
introduced by the Budget Speech, becomes part of the original Income Tax Act. This is why we refer
to the legislation as the Income Tax Act 58 of 1962, as amended.
Bills and Acts

A Bill is a law that has been drawn up but not passed by the legislators. Bills go through
several stages, called readings, before they are finalised. The public is also given a spe-
cified period during which they can make comments on the Bill and submissions can also
be made to the Standing Committee on Finance, either in writing or in person (or both).
An Act is a Bill that has been passed by Parliament before it has become a law.
1.5 The Income Tax Act 58 of 1962 (as amended)

Apart from the government spending on health, education and other social issues, the budget mainly
affects individuals through the changes brought about in the levying of taxes. A number of amend-
ment Acts affect the Income Tax Act every year. Before Parliament passes legislation, one refers to
its draft format as a Bill. An explanatory memorandum will always accompany a Bill, explaining the
reasons for the amendments contained in the Bill.
Soon after the budget speech each year, the Rates and Monetary Amounts and Amendment of
Revenue Laws Bill will be released. This Bill gives effect to the changes to monetary amounts as
approved in the national budget.
Normally during July each year, the Draft Taxation Laws Amend-
ment Bill (often referred to as TLAB) and the Tax Administration
Laws Amendment Bill are published for public comment. Once
public comments have been taken into account, the final Bill is
published and once the State President signs this Bill, it becomes
an Act of Parliament. Prompt publication of an Act is important –
the Act takes effect on the date of its publication or on a date
determined in terms of the relevant Act.
The term ‘date of promulgation’ of an amendment Act

means the date of the Act’s publication in the Govern-
ment Gazette.
Figure 1.6: The first page of a typical Government Gazette
Sometimes the budget proposes amendments that need further consultation. In such cases, a further
Bill might be released later in the year to give effect to these amendments.
The Taxation Laws Amendment Act affects, among other things, the Income Tax Act. SARS levies
income tax in South Africa in terms of this Act.
The Income Tax Act is divided into parts. Each part has sections; each section has paragraphs and
sub-paragraphs; and 11 Schedules are attached to the Act. Income tax legislation in South Africa
was first introduced in 1914. This Act was repealed and replaced with our current Act in 1962. Since
then, the Income Tax Act has undergone many changes.
Table 1.1: The Structure of the Income Tax Act, 1962, as amended
ŚĂƉƚĞƌϭ ŚĂƉƚĞƌϭϲ
ŚĂƉƚĞƌϮ ŚĂƉƚĞƌϭϳ

ŚĂƉƚĞƌϯ ŚĂƉƚĞƌϭϴ
ŚĂƉƚĞƌϰ ŚĂƉƚĞƌϭϵ
ŚĂƉƚĞƌϱ ŚĂƉƚĞƌϮϬ ! "
ŚĂƉƚĞƌϱ # ŚĂƉƚĞƌϮϭ
ŚĂƉƚĞƌϲ $ ŚĂƉƚĞƌϮϮ %

ŚĂƉƚĞƌϳ ŚĂƉƚĞƌϮϯ %
%
ŚĂƉƚĞƌϴ & ## ŚĂƉƚĞƌϮϰ $ '

ŚĂƉƚĞƌϵ ŚĂƉƚĞƌϮϱ
ŚĂƉƚĞƌϭϬ " ŚĂƉƚĞƌϮϲ

ŚĂƉƚĞƌϭϭ $ ŚĂƉƚĞƌϮϳ ' '
ŚĂƉƚĞƌϭϮ ŚĂƉƚĞƌϮϴ ()
(

ŚĂƉƚĞƌϭϯ # ŚĂƉƚĞƌϮϵ
ŚĂƉƚĞƌϭϰ # ŚĂƉƚĞƌϯϬ
ŚĂƉƚĞƌϭϱ
The current Income Tax Act contains provisions for the levying of many different types of taxes, for
example:
• normal tax (consisting of both income tax and capital gains tax);
• provisional tax;
• employees’ tax;
• donations tax;
• dividends withholding tax;
• other withholding taxes;
• turnover tax.
The Commissioner administers the Income Tax Act for the South African Revenue Service.
1.6 The Tax Administration Act 28 of 2011 (as amended)

The Tax Administration Act incorporates in one piece of legislation certain generic administration
provisions which, before 2012, were duplicated in different tax Acts. The first draft of the Tax Admin-
istration Bill was published in 2009 and after an extensive consultation process the Tax Administra-
tion Act 28 of 2011 was promulgated on 4 July 2012.
Tax legislation deals with two aspects of tax, namely tax liability provisions and tax administrative
provisions. With the advent of this Act most of the administrative provisions were removed from the
other Tax Acts and this Act only deals with tax administration.
Table 1.2: The Structure of the Tax Administration Act (SARS Short Guide to the Tax Administration
Act, 2011)
ŚĂƉƚĞƌϭ ŚĂƉƚĞƌϭϭ & (
ŚĂƉƚĞƌϮ " ' ŚĂƉƚĞƌϭϮ
ŚĂƉƚĞƌϯ & ŚĂƉƚĞƌϭϯ &
ŚĂƉƚĞƌϰ & & ŚĂƉƚĞƌϭϰ * #
ŚĂƉƚĞƌϱ " ŚĂƉƚĞƌϭϱ '
ŚĂƉƚĞƌϲ # ( ŚĂƉƚĞƌϭϲ +
ŚĂƉƚĞƌϳ ' & ŚĂƉƚĞƌϭϳ # !
ŚĂƉƚĞƌϴ ' ŚĂƉƚĞƌϭϴ &
ŚĂƉƚĞƌϵ & ŚĂƉƚĞƌϭϵ "
ŚĂƉƚĞƌϭϬ , (- ( ŚĂƉƚĞƌϮϬ
1.6.1 The Tax Ombud

When the Tax Administration Bill was published for public comment, many believed that there
seemed to be no consequences if SARS abused the powers that were given to them by the Bill.
When it was promulgated, the Tax Administration Act made provision for a Tax Ombud and the Office
of the Tax Ombud (OTO) was established in October 2013 to enhance the tax administration system.
Before this, taxpayers had no independent channel where they could complain if they had used all
the SARS complaints processes available to them. The Office works with taxpayers who have been
unable to resolve any service, procedural or administrative complaints through the normal SARS
channels.
One of the key responsibilities of the OTO is to maintain a balance between SARS’ powers and
duties, on the one hand, and taxpayer rights and obligations on the other. When resolving complaints
from taxpayers, the OTO communicates with SARS officials. The Tax Ombud also has access to the
SARS system and taxpayer information, and this assists him in the resolving of complaints lodged.
The OTO maintains independence at all times. For more about the OTO you can go to their website
www,taxombud.gov.za or emails with complaints can be sent to complaints@ taxombud.gov.za.
1.7 The South African Revenue Service

The Commissioner for the South African Revenue Service (CSARS) has his/her headquarters in
Pretoria and is responsible for carrying out all the rules that are included in the Income Tax Act. The
Commissioner delegates his/her powers to the Receivers of Revenue in various cities, towns and
centres. The Commissioner, the Receivers of Revenue and all the revenue service’s staff work for an
institution known as the South African Revenue Service (SARS). The Commissioner is the head of
SARS and is also known as the chief executive officer. The Commissioner reports to a board of
directors, who, in turn, is accountable to the Minister of Finance.
Previously, one would also refer to the CSARS as the Commissioner for Inland Revenue (CIR), or the
Secretary for Inland Revenue (SIR). These references become evident when referring to court deci-
sions.
The establishment of SARS, an independent and autonomous section of the government, took effect
in terms of the South African Revenue Service Act. It is outside the public service, but within public
administration; so although the National Treasury sets South Africa’s tax regime, the CSARS manages
(administers) it.
SARS is responsible for administering the following taxes:
J Income tax
Income tax is the government’s main source of income and SARS levies this tax in terms of the
Income Tax Act 58 of 1962 (as amended). It levies income tax on the world-wide income of South
African residents, while non-residents only pay income tax on income that is either from a South
African source, or deemed to be from a South African source.
Companies and Close Corporations (CCs) pay income tax at a fixed rate of 28%. Small business
corporations (a special type of company/CC for tax purposes) have a progressive tax rate, which
means that the rate increases as income increases. For the years ending on any date between
1 April 2017 and 31 March 2018 (referred to as the 2018 year of assessment), the rates are as
follows:
Taxable income Rate of tax

R0–R75 750 0% of taxable income
R75 751–R365 000 7% of the taxable income above R75 750
R365 001–R550 000 R20 248 + 21% of taxable income above R365 000
R550 001 and above R59 098 + 28% of taxable income above R550 000
Certain qualifying micro businesses pay tax on turnover per annum. The tax on the taxable turn-
over for the year ending on any date between 1 March 2017 and 28 February 2018 (referred to as
the 2018 year of assessment) is calculated using the following rates:
Turnover Marginal Rates (R)

R0–R335 000 0%
R335 001–R500 000 1% of each R1 above R335 000
R500 001–R750 000 R1 650 + 2% of the amount above R500 000
R750 001 and above R6 650 + 3% of the amount above R750 000
The tax rate for individuals is also progressive. For the 2018 year of assessment, the rates are as
follows:
Taxable income (R) Rate of tax

R0–R189 880 18% of taxable income
R708 311–R1 500 000 R209 032 + 41% of taxable income above R708 310
R1 500 001 and above R533 625 + 45% of taxable income above R1 500 000
J Capital gains tax (CGT)

SARS introduced this type of tax in October 2001. CGT forms part of the income tax system (refer
to the detailed discussion on CGT in chapter 7).
J Value-added tax (VAT)

SARS levies value-added tax at 14% on all goods and services (excluding certain exemptions,
exceptions, deductions and adjustments). The VAT Act 89 of 1991, as amended, provides for this
type of tax. VAT is the government’s second biggest source of income (refer to chapter 9, which
deals with VAT).
J Customs duty
Customs duties are levies charged on goods that people import into or export from South Africa
(refer to chapter 9, which covers some aspects of customs duty)
J Dividends tax
Dividends tax is applicable to all South African resident companies as well as non-resident com-
panies listed on the JSE Ltd (Johannesburg Stock Exchange Limited). Dividends tax is borne by
the beneficial owner of the share at a rate of 20% (up to 22 February 2017 – 15%).
J Excise duty
SARS levies excise duty on certain goods, such as tobacco and liquor, and as an ad valorem
duty on cosmetics, televisions, audio equipment and motor vehicles (refer to chapter 9 for a brief
discussion on customs and excise duty).
Another ad valorem duty is the carbon dioxide (CO2) vehicle emissions levy. The emissions levy is
in addition to the current ad valorem luxury tax on new vehicles. The main objective of this levy is
to influence the composition of South Africa’s vehicle fleet to become more energy efficient and
environmentally friendly. The levy is payable on new passenger motor vehicles and on double-
cab vehicles.
J Transfer duty
Transfer duty is payable by individuals when they buy property (refer to chapter 9, which deals
with transfer duty).
J Estate duty
Estate duty is a tax that is levied on the property (net assets, i.e. assets less liabilities) of people
who have died (refer to chapter 7 for estate duty).
J Securities transfer tax

Securities transfer tax is payable in respect of the issue and change in ownership of any securi-
ties that are transferred without a written instrument and do not have a certificate.
Security transfer tax is a tax levied on every transfer of a security. A security, in essence, means
any:
• share in a company;
• member’s interest in a close corporation; or
• right or entitlement to receive any distribution from a company or close corporation.
The following securities are taxable: only securities issued by:
• companies incorporated, established from inside the Republic; and
• companies incorporated, established or formed outside the Republic, which are listed on a
South African exchange.
J Skills development levy (SDL)

The skills development levy is a compulsory levy scheme for the funding of education and train-
ing (refer to chapter 9 for a discussion on the application of SDL).
J Unemployment Insurance Fund (UIF)

The UIF provides short-term relief to workers when they become unemployed or are unable to
work because of maternity or adoption leave, or illness (refer to chapter 9, which covers UIF).
J Air passenger tax

This is a tax levied on passengers departing on international flights.
1.8 General aspects of taxation

1.8.1 Basis of taxation
In South Africa, SARS applies the residence basis of taxation to taxpayers. Prior to 1 January 2001,
SARS taxed South African taxpayers on the source basis of taxation. Under the current residence
system of taxation, South African taxpayers who are residents are subject to taxation in terms of the
Income Tax Act in respect of all the income that they earn, including their world-wide income. Where
a person is not a resident of South Africa for income tax purposes, SARS will still tax this taxpayer
according to the South African rules on income earned from a South African source.
This system of taxation can lead to a person having to pay tax in two different countries and it can
result in a negative influence on trade between countries. To avoid double taxation, many countries
enter into agreements that they call tax treaties or double-tax agreements (DTAs).
A DTA is an agreement between two governments aimed at preventing double taxation and the
avoidance of taxation between two countries by agreeing which country has a taxing right on certain
transactions. Generally, DTAs allow the source country to tax the income. South Africa has entered
into a number of DTAs to ensure that South African residents are not paying double tax. Alternatively,
there is also a provision (section 6quat) in the Income Tax Act that allows for a rebate of foreign taxes
paid by a South African resident.
Chapter 4 covers the requirements for classifying persons as residents for income tax purposes.
1.8.2 Types of taxation

One can classify taxation in South Africa according to a number of factors, and base this classifica-
tion of tax on a) what the tax is levied on, b) the method used to calculate the tax, or c) who must pay
the tax.
Table 1.3: Types of taxation
(a) What the tax is levied on (b) Method used to calculate (c) Who must pay the tax
tax
Income tax Proportional tax Direct tax
Tax levied on earned income Tax levied at a fixed rate The person who earns the income,
Example: Income tax Example: Corporate Income tax pays the tax
Example: Income tax, capital gains tax
Consumption tax Progressive tax Indirect tax
Taxes levied on the sale or use The tax rate increases with the The seller bears the impact of the tax,
of commodities. These taxes amount of income earned while the consumer pays the tax
take the form of price increases Example: Income tax on natural Example: VAT
and are paid by the person persons
purchasing or using the com-
modity
Example: VAT, excise duty,
customs duty
continued
(a) What the tax is levied on (b) Method used to calcu-

late tax
Wealth tax Regressive tax
Taxes levied on the transfer of The tax rate decreases with
property the amount of income earned
Example: Capital gains tax, estate Example: Not applicable to
duty, donations tax South Africa
Other tax
Taxes levied on specific trans-
actions
Example: Transfer duty, marketable
securities tax, fuel levy, dividends
tax
This book concentrates on income tax, which is a direct tax. Chapter 7 covers capital transfer taxes,
while chapter 9 covers a cross-section of other taxes that have an effect on an individual.
1.9 Order of authority and interpretation of tax law

The taxation rules (commonly referred to as provisions) contained in the Income Tax Act are not
always clear and straightforward. In practice, this often results in different interpretations by SARS,
taxpayers, tax practitioners and the general public. As a result of these differences of opinion and
grey areas, the courts are often called upon to determine what the real intention of the legislature was
when the provisions were enacted.
SARS, as the administrator of the Income Tax Act, currently issues Advanced Tax Rulings (ATR). In
the past, SARS issued interpretation notes and practice notes (some of which are still in use). An ATR
relates to certain taxation rules in order to provide clarity and guidance to taxpayers. The need for
interpretation only arises where a provision in the Income Tax Act is not clear. An Advanced Tax
Ruling is where a taxpayer can request certainty from SARS in the form of the Commissioner’s inter-
pretation and application of the tax laws about a proposed transaction. The ATR can take the form of
a Binding General Ruling (BGR), binding private ruling (BPR) or a binding class ruling (BCR).
1.9.1 Interpretation rules

As stated above, the Income Tax Act is not always clear. The rules are often complicated and the
wording that is used can have more than one meaning. Sometimes certain rules give SARS discretion
as to how it should apply certain provisions of the Income Tax Act. In order to resolve this confusion,
the Commissioner can issue ATRs or interpretation notes (previously called practice notes).
Advanced tax rulings
The advanced tax ruling system was created to promote clarity, consistency and certainty regarding
the interpretation and application of the tax Acts. In terms of section 89 of the Tax Administration Act,
a senior SARS official may issue a BGR in respect of the application or interpretation of tax law on a
matter of general interest or importance. These rulings are binding on SARS and on taxpayers.
A BGR can be effective for either:
• a particular year of assessment or other definite period; or
• an indefinite period.
An issued BGR must state:
• that it is a binding general ruling;
• which provisions of the Act are the subject of the BGR; and
• either the year of assessment (or other definite period to which it applies), or that it applies to an
indefinite period, and the start date of this period.
A BGR can take any form as determined by the Commissioner, and can include interpretation notes
and practice notes.
On the other hand, a BCR or BPRs are issued in response to an application by a taxpayer in respect
of a specific proposed transaction. Both of these applications must be made through eFiling and,
depending on the type of taxpayer, an application fee of up to R14 000 will be involved. SARS may
also charge cost recovery fees based on the complexity of the transaction.
A BPR clarifies how the Commissioner would interpret and apply the provisions of the tax laws to one
or more parties to a specific proposed transaction and a BCR clarifies how the Commissioner will
interpret and apply the provisions of the tax Act to a specific ‘class’ of persons in respect of a ‘pro-
posed transaction’.
Interpretation notes
Interpretation notes are merely the opinion of SARS and do not form part of the Income Tax Act, and
are also not binding on SARS, unless they are binding private or class rulings. Therefore, taxpayers
can object to an assessment even though SARS has assessed the taxpayer in terms of an interpret-
ation note. The purpose of the interpretation notes is thus to set out how SARS will interpret or apply
certain provisions. A court of law may also not agree with an interpretation note. However, the excep-
tion to this rule is when the interpretation note provides guidance as to how the Commissioner intends
to use his/her discretion. In this instance, the interpretation note will be binding on SARS and will
therefore have the same effect as the law.
Interpretation of words
Most of the definitions of words and terms that are used in the Income Tax Act are contained in
section 1, but sometimes other sections contain definitions as well. Where a term is used in the Act,
but not defined in the Act, one has to refer to the Interpretation Act 33 of 1957. The purpose of the
Interpretation Act is to facilitate the interpretation and understanding of legislation, to promote uni-
formity in the use of language in legislation, and to align the interpretation of legislation with the
Constitution. Where a term is defined in both the Income Tax Act and the Interpretation Act, the
definition as per the Income Tax Act will take precedence over the definition in the Interpretation Act.
When interpreting wording used in the Income Tax Act, the following should be kept in mind:
• The literal meaning (which must be applied first) – words must be limited to their simplest, ordin-
ary, most obvious meanings; if the meaning is clear, it must be applied, even if it gives rise to un-
fair results.
• The intention of the legislator – when a provision is brought into the Income Tax Act for the first
time, it is normally covered by some discourse or explanation in an explanatory memorandum.
This explanation will generally give the intention of introducing the provision, which will in turn
indicate the intention of the legislator.
• The contra fiscum rule – this rule provides that where a provision of the Income Tax Act has two
interpretations, the court will interpret the provision in light of the interpretation that places the
smaller burden on the taxpayer. That is, the courts will rule in favour of the meaning that is to the
best advantage of the taxpayer.
In light of the above ‘tips’ on interpreting legislation, one should remember that hardship is not an
excuse or way out. Even if a provision leads to hardship for a taxpayer, it cannot be interpreted
differently so as to alleviate the hardship.
The rules of interpretation will not solve all disagreements between SARS and taxpayers. Often a dis-
agreement must be resolved in the Tax Court.
1.9.2 Dispute resolution between SARS and taxpayers

When a taxpayer does not agree with an assessment or is not satisfied with a decision made by
SARS, if the decision is subject to objection and appeal, the taxpayer has the right to dispute the
assessment or decision. Chapter 9 of the Tax Administration Act (section 103) provides a legal
framework for disputes in terms of all tax types. The SARS Dispute Resolution Guide provides the
following graphic in terms of the Dispute Resolution Process:

(http://www.sars.gov.za/AllDocs/OpsDocs/Guides/LAPD-TAdm-G05%20%20Dispute%20Resolution%
20Guide% 20%20External%20Guide.pdf)
Figure 1.7: Dispute Resolution Process
Legal remedies
Once SARS has assessed a taxpayer and issued an ITA34, a taxpayer may request any reasons for
the assessment from SARS within 30 business days from the date of the assessment (this can be
done electronically via eFiling). If the taxpayer realises that he/she has made a mistake, the Request
for Correction process can be followed in order to correct a previously submitted return/declaration
for Income Tax. If the taxpayer disagrees with SARS regarding an assessment, the disagreement can
be legally resolved through the process of Objection and Appeal, the Alternative Dispute Resolution
(ADR) process, the Tax Board or the Tax Court.
J Objection and appeal

A taxpayer must make his/her objection within 30 days from the date of assessment. If a Request
for Reasons has been submitted, once the system has identified that a valid Request for Reasons
has been submitted, the period within which an objection must be lodged will be automatically
extended. The Income Tax Act provides the manner in which a taxpayer should submit any ob-
jection. Objection to an assessment must be made on an ADR1 form (refer to paragraph 2.10 for
details regarding this process and form).
If the taxpayer is not satisfied with the outcome of the objection, he/she may appeal. The appeal
will be heard in either the Tax Board or the Tax Court, depending on the circumstances (refer
below).
J Alternative dispute resolution (ADR)

When taxpayers decide to make a notice of appeal against an assessment, they can inform SARS
that they wish to make use of the ADR process. SARS must inform the taxpayer within 30 busi-
ness days whether the matter is suitable for ADR. The ADR process allows the Commissioner to
settle a dispute directly with a taxpayer. SARS and the taxpayer may use this process to settle
any type of dispute that relates to the interpretation of facts. To settle does not mean that the tax-
payer or SARS has to accept one or the other’s interpretation; it just means that both parties must
agree to the tax in question.
SARS has to keep a register of all the disputes that it settles by means of this process. The pro-
cedure for settlement must include the following elements:
• all details must be made known by the taxpayer;
• the settlement agreement must be in writing;
• there must be an explanation of how the issue was settled; how the issue will be treated in
future; what each of the parties agree to do about it; the withdrawal of the objection and
appeal; and the arrangements for payment, if necessary;
• the secrecy provisions must be adhered to;
• the agreement is final unless the taxpayer does not pay the amount agreed upon, or if there
was fraud involved, or if not all the facts were given; and
• SARS must alter the taxpayer’s assessment. This amount is final and cannot be subject to
further objection or appeal.
An ADR process must be concluded within 90 days.
J The Tax Board

Any taxpayer who disagrees with SARS on any decision of the Commissioner may appeal to the
Tax Board, provided that the:
• amount in question is less than R500 000 (this can be changed by the Minister of Finance); or
• the Commissioner and the taxpayer mutually agree to make use of the Tax Board; or
• neither the taxpayer nor the Commissioner object to the Tax Board making a ruling.
The Tax Board consists of an advocate or attorney. If necessary, an accountant or representative
of the commercial community will also be present. Where the board consists of more than one
member, the advocate or attorney will chair the board.
The taxpayer and SARS must also agree that a matter is to be heard by the Tax Board. If the
taxpayer or SARS is not satisfied with the decision of the Tax Board, the taxpayer or SARS may
request that the matter be heard de novo by the Tax Court. This is not an appeal against the de-
cision of the Tax Board, but a completely new trial.
The sittings of the Tax Board are not public and the Board's decisions are not published by
SARS.
The decisions of the Tax Board are binding on the parties but have no precedent value. It is very
important to note that if the taxpayer fails to arrive for the hearing, SARS can continue with the as-
sessment as issued, and the taxpayer cannot appeal against it again.
If the taxpayer or the Commissioner is still not satisfied after the Tax Board’s decision on the
issue, the matter can be taken to the Tax Court.
J The Tax Court (previously known as the Special Court for Hearing Income Tax Appeals)
Where an ADR process was unsuccessful in resolving a disagreement, or where the Tax Board
has referred an appeal, the Tax Court is next in line to try to solve the disagreement between
SARS and the taxpayer.
The Tax Court consists of a judge of the Supreme Court (who will be the court president), an
accountant (who has been an accountant for more than 10 years), and a representative of the
commercial community. The taxpayer may represent him-/herself in the Tax Court, which is com-
petent to decide an issue between parties, even though it is not a court of law. The Tax Court is a
creature of statute, that is, it does not have the High Court’s inherent powers. Although the Tax
Court is not a court of law, its rulings have persuasive value to the parties concerned. The powers
of the Tax Court are set out in Part D of the Tax Administration Act.
The outcome of a hearing of a case by the Tax Court is only binding between SARS and the
specific taxpayer, and the case does not set any legal precedent; therefore, the Tax Court is not
bound by its own rulings.
In both the Tax Board and the Tax Court, the burden of proof is always on the taxpayer.
This means that the taxpayer must prove, for example, that:
• an amount, transaction, event or item is exempt or not taxable;
• an amount or item is deductible; or
• a valuation is correct, etc.
The only exception to the rule is when an amount is in question; then the onus of proof is
on the Commissioner.
Where the taxpayer or SARS is not satisfied with the decision of the ADR process, the Tax Board
or the Tax Court, an appeal may be lodged with the Provincial Division of the High Court.
J Provincial Divisions of the High Court (previously known as the Supreme Court)
The High Court hears any case that is too serious for the Tax Board or Tax Court, or where some-
one lodged an appeal against a judgment in a case (i.e. where a taxpayer or SARS wants to
change a decision).
One judge hears cases of the High Court, but when a case is under appeal, there must be at
least two judges. High Courts have the right to hear a case in the defined provincial area in which
they are situated, and decisions are binding on all other High Courts.
If the president of the Tax Court grants permission, the taxpayer or the Commissioner may appeal
directly to the Supreme Court of Appeal. A judgment of the Supreme Court of Appeal is binding
on all the lower courts, such as the High Court and the Tax Court – a concept known as legal
precedent.
It is because of this legal precedent that one also needs to know about court decisions and
judgments when looking at the Income Tax Act and all the rules contained in it, as these deci-
sions also affect the application of the Income Tax Act in practice.
J Supreme Court of Appeal (previously known as the Appellate Division)

This is the highest court (except for the Constitutional Court) and this Court, based in Bloemfon-
tein, has the final say on all matters, except in the case of constitutional issues. This Court only
hears cases that are under appeal.
Three to five judges hear and make decisions regarding all cases in this Court. The final decision
of this Court is the one supported by the majority of the judges hearing the case.
J Constitutional Court
The Constitutional Court is the highest court in South Africa and deals with issues of a constitu-
tional nature. A taxpayer will appeal or challenge a decision by the Commissioner in the Constitu-
tional Court in the event that a dispute is unconstitutional.
J Citation of court cases

There is a specific way of referring to court cases, in order to identify the place and time of the
decision. The reference must consist of the following parts:
<names of parties><year of the law report in which the case was published><volume num-
ber><abbreviation indicating the court that delivered judgment><page number and paragraph>.
The names of the parties should be in italics and the citation should refer to the South African Law
Reports whenever possible.
The abbreviations for the courts are as follows:
(ITC)/(SATC) Tax Court
(HC) High Court
(SCA) Supreme Court of Appeal of South Africa
(CC) Constitutional Court
When one wants to apply the principles decided in a court case, the case is ‘referred to’. Some
examples of ways in which court cases will be ‘referred to’, include:
Table 1.4: References to the different courts

Court Referred to as
A Tax Board decision Special Board Decision No 74
An old Tax Court decision ITC 1 SATC 50
A new Tax Court decision ITC 1843 (2010) 72 SATC 229
A High Court decision Mokoena v Commissioner for the South African Revenue Service
[2010] ZAGPJHC 79
Supreme Court of Appeal decision OLD CASE:
Baikie v CIR1931 AD 496 (‘AD’ is short for Appellate Division)
NEW CASE:
Singh v Commissioner for South African Revenue Service 2003
(4) SA 520 (SCA), 65 SATC 203; Stevens v CSARS [2006]
SCA145 (RSA)
A Constitutional Court decision Van der Merwe and Another v Taylor NO and Others (CCT45/06)
[2007] ZACC 16; 2007 (11) BLCR 1167 (CC); 2008 (1) SA 1 (CC)
Service delivery and procedural issues

Taxpayers who have a service delivery issue or dispute with SARS may contact the SARS Complaints
Management Office (CMO), which operates independently of SARS branch offices and reports di-
rectly to the Commissioner.
Figure 1.8: Process for complaints (http://www.sars.gov.za/Contact/How-Do-I/Pages/Lodge%20a%

20complaint.aspx)
The purpose of the CMO is to act as a complaints office to assist taxpayers who are having difficulty
in resolving problems of a procedural nature with SARS. The CMO has no role to play in regard to
adjudicating on the substance of a taxpayer’s dispute with SARS regarding tax liability or legal rights.
Other remedies available to an aggrieved taxpayer include the lodging of a complaint with the Public
Protector and the Tax Ombud (as discussed earlier).
1.10 Summary
This chapter examined how the Income Tax Act came into existence and how it changes every year.
The process of the National Budget is a process that plans broadly for three years, but then concen-
trates on the income and expenditure that will need to take place in one year. As a result of the
National Budget, the government amends the Income Tax Act annually to give effect to the changes
in the budget.
As the wording used in the Income Tax Act is often complicated, and the rules that it contains are
complex, a system is in place whereby a taxpayer and the Commissioner can solve their disagree-
ments through objection, appeal, ADR and the courts. Where a taxpayer is not happy with an
assessment, the taxpayer can object to the assessment (refer to paragraph 2.10).
If the taxpayer is still not satisfied with the outcome of the objection, he/she may take one of the steps
illustrated in Figure 1.9:
Alternative Dispute
Resolution process
Tax Board
Tax Court
High Court
Supreme
Court
Constitutional
Court
Figure 1.9: Steps in the dispute resolution process
Other remedies available to an aggrieved taxpayer include the lodging of a complaint with the Public
Protector and the Tax Ombud, as envisaged under the Tax Administration Act.
1.11 Test your knowledge

1. When does the South African government’s accounting year start and end?
2. What does the South African government call its accounting year?
3. What is the tax year for an individual called?
4. When does a tax year for an individual commence and end?
5. What does the national budget describe?
6. Who presents government’s three-year spending plans?
7. What does one call an Act before it is passed by Parliament?
8. List the different types of taxes.
9. Who administers the Income Tax Act?
10. What is the difference between the basis of taxation for residents of South Africa and non-
residents?
11. At what rate does SARS currently levy VAT?
12. Explain the difference between direct taxes and indirect taxes.
13. What are binding general rulings, and who can issue these rulings?
14. What is legal precedent?
Answers
CHAPTER
2 Introduction to the
Annual Income Tax Framework
Author: S Smulders
Contents
Page
2.1 Introduction ........................................................................................................................... 24
2.2 Individuals earning a monthly salary .................................................................................... 25
2.3 Individuals earning other sources of income ........................................................................ 25
2.4 The IRP5/IT3(a) ..................................................................................................................... 26
2.5 Persons liable for income tax ................................................................................................ 28
2.6 Registration as a taxpayer with SARS................................................................................... 29
2.7 Annual submission of tax returns .......................................................................................... 33
2.7.1 Manual submission ................................................................................................... 37
2.7.2 Electronic submission of returns (eFiling) ................................................................ 37
2.8 SARS eFiling.......................................................................................................................... 38
2.9 Income tax notice of assessment (ITA34) ............................................................................ 39
2.9.1 Normal tax ................................................................................................................. 40
2.9.2 Rebates ..................................................................................................................... 40
2.9.2.1 Annual rebates.............................................................................................. 40
2.9.2.2 Medical tax credits ....................................................................................... 42
2.9.3 Net normal tax ........................................................................................................... 50
2.9.4 Final tax liability ......................................................................................................... 51
2.10 Review of the notice of assessment (ITA34) ......................................................................... 52
2.11 Penalties ................................................................................................................................ 54
2.12 Summary ............................................................................................................................... 54
23

9 understand the importance and impact of the Income Tax Act 58 of 1962 (as amended) (the
Income Tax Act) on individuals.
9 understand the income tax framework of individuals earning a salary or wage.
9 understand and explain when individuals are required to register as taxpayers.
9 identify and complete the application for registration as a taxpayer with SARS.
9 explain the eFiling process and eFiling of the ITR12 return for individuals.
9 calculate the normal tax of an individual.
9 calculate the annual rebates and medical tax credits due to individuals.
9 calculate the net normal tax payable/refundable by/to individuals.
9 understand the importance of reviewing the ITA34 notice of assessment.
9 understand what penalties will be payable if the taxpayer does not comply with the Income Tax
Act.
2.1 Introduction
The government must plan and budget, just as a natural person does (refer to chapter 1). The differ-
ence, however, is that an individual knows how much salary he or she is earning, whereas the gov-
ernment first needs to estimate its expenditure before it can budget for its income to meet the
expenditure required. The majority of the revenue that the government earns, as explained in chap-
ter 1, is collected in the form of taxation. It is interesting to note that taxation on individuals is by far
the government’s biggest source of revenue.
One may well wonder how the budget has an impact on the individual. Someone who is still a full-
time student and not yet working for a salary will definitely start earning a salary in the near future.
No-one wants to work for nothing, and receiving a first salary is a big event. However, earning a
salary comes with responsibilities, and paying tax is one such responsibility.
This is a big responsibility as the tax money that an individual pays is used by the government to pay
for many important things, such as schools, hospitals, clinics, the police and firefighters, the roads
that you travel on to ensure that they are safe and well maintained, to fund public libraries and parks,
and many other common resources that we as South African citizens use.
In order to understand how the government collects tax from individuals, one needs to examine the
process that a person earning a salary will go through in a year (refer to the diagram of this process
under paragraph 2.12).

J Payslip J Notice of assessment (ITA34)
J IRP5/IT3(a) J Provisional tax
J Annual income tax return (ITR12) J Reviewing the notice of assessment (ITA34)
Chapter 2: Introduction to the Annual Income Tax Framework 25
2.2 Individuals earning a monthly salary

At the end of each working period (normally a month), when an employer pays its employees, the
payment of each employee must be substantiated by issuing a payslip. The payslip indicates the
total income earned by the individual, for example, salary, bonus, travel allowance (if applicable) and
leave pay. The deductions made against the income, for example, taxation, pension fund contribu-
tions, medical fund contributions and UIF (Unemployment Insurance Fund contributions), will also be
clearly indicated on the payslip. The balance calculated is the net amount that the employee will
receive in his or her bank account.
Every person employed in South Africa must, by law, pay 1% of his or her salary (limited to a nominal
amount) to the Unemployment Insurance Fund. The person who pays the salary (the employer)
makes this deduction. The employer is also required to make a company contribution, calculated at
1% of the employee’s salary (limited to the nominal amount), to this fund.
COMPANY Period Employee Name

Oxford Manufacturing (Pty) Ltd 31/03/2017 Mr J Brown
Identity number
7409225892081
Company Address
PO Box 123
Sandton
2146
Cost Empl No Designation Hrly Rate Paypoint Children Sex Status

0001 106,71 0 Male Married
EARNINGS DEDUCTIONS
Description Quantity Amount Description Amount Balance
Basic Salary 18 500,00 PAYE Tax 2 615,94
Overtime @ 1,5 5,00 800,36 UIF Contribution 148,72
TOTAL EARNINGS 19 300,36 TOTAL DEDUCTIONS 2 763,72

LEAVE DAYS DUE 0,00 Cheque NET PAY 16 536,64
3699 Gross Remu- 4103 Total Employees’ 4005 Medical Aid Contri- 4001 Pension fund
neration tax butions – current
19 300,36 2 615,94 0,00 0,00
Figure 2.1: A typical payslip
2.3 Individuals earning other sources of income

Certain individuals also earn income from sources other than employment. This may include rental
income, investment income and business income. These individuals are required to register as
provisional taxpayers and pre-pay tax during the tax year using an IRP6 form (refer to chapter 8 for
further details).
2.4 The IRP5/IT3(a)

The Income Tax Act defines a year, for tax purposes (for an individual), as ending on 28/29 February
each year, which means that it started on 1 March of the previous year. This year is often referred to
as a ‘year of assessment’ or a ‘tax year’. When referring to a specific tax year, one refers to the last
date of February; thus, reference to the 2018 year of assessment, for example, refers to the tax year
that started on 1 March 2017 and ends on 28 February 2018.
After the end of each year of assessment, an employer will provide its employees with an IRP5/IT3(a)
certificate that summarises all the information (income and deductions) contained in the 12 months’
payslips that the employer issued for that year of assessment. The IRP5/IT3(a) also indicates the
PAYE (Pay-As-You-Earn) tax that has been deducted (employees’ tax) for that year of assessment.
PAYE is commonly referred to as the process of deducting or withholding tax from remuneration as it
is earned by an employee.
Examples of income requiring the deduction of PAYE include:
• salaries;
• wages;
• bonuses;
• overtime;
• fringe benefits.
For tax purposes, the term ‘remuneration’ describes these total earnings. The following are allowable
deductions from remuneration before PAYE is calculated (see chapter 8 for more details about this):
• pension fund contributions;
• provident fund contributions;
• retirement annuity fund contributions; and
• donations to approved public benefit organisations.
Below is an example of an Employee Income Tax Certificate
(continued)
(continued)
(continued)
Figure 2.2: A typical IRP5/IT3(a)
If the employer deducted too much PAYE during the year, SARS, on assessment, can refund the
excess PAYE portion of employees’ tax to the taxpayer. For this process, the employee needs to
complete a tax return (ITR12) and submit it to SARS for assessment.
SARS calculates the annual income tax by using a taxpayer’s taxable income. The rules for calcu-
lating taxable income are contained in the Income Tax Act.
The taxpayer must declare all income received during the tax year and disclose all amounts spent in
earning income and contributed to funds in order for SARS to make a correct assessment of the
taxable income for the year.
2.5 Persons liable for income tax

Individuals younger than 65 years of age earning less than R75 750 per annum, individuals 65 years
of age or older earning less than R117 300 per annum, and individuals 75 years of age or older
earning less than R131 150 per annum, are not liable for income tax for the 2017/2018 year of
assessment. SARS refers to this as the income tax threshold, which exists as a result of the annual
rebates available to natural persons. The primary rebate available to individuals younger than 65 for
the 2018 year of assessment, is R13 635; the secondary rebate available to individuals 65 years or
older is an additional R7 479, and the tertiary rebate is an additional R2 493 for individuals 75 years
or older.
The rebates thus give individuals a tax-free income portion which is supposed to compensate them
for their cost of living expenses. Table 2.1 illustrates how the tax thresholds and rebates are deter-
mined.
Table 2.1: Determination of tax thresholds and rebates

Younger than 65 65 years or older 75 years or older
Taxable income of the person
R R R
Taxable income 75 750 117 300 131 150
Tax on taxable income (at 18%) 13 635 21 114 23 607
Less rebates:
Primary (13 635) (13 635) (13 635)
Secondary – (7 479) (7 479)
Tertiary – – (2 493)
Net income – – –
The income tax thresholds change annually, because they are dependent on the tax rebates set by
the Minister of Finance annually in the budget (i.e. the tax thresholds change as the rebates change
each year).
See paragraph 2.9.2 for a detailed explanation of the workings of tax rebates.
2.6 Registration as a taxpayer with SARS

If a taxpayer earns taxable income that is above the tax threshold (as discussed above), that person
must register as a taxpayer with SARS. To register, a taxpayer is required to visit a SARS branch
once to verify their identity, address and bank details. Apart from this physical verification, the rest of
the registration process can be performed on eFiling. The following recent documents will be re-
quired when the person visits the SARS office:
• an identity document (ID) (can be ID, temporary ID, passport or driver’s licence);
• banking details, by way of a copy of an original bank statement, ATM/Internet-generated state-
ment, or ABSA eStamped statement not older than three months that confirms the account hold-
er’s details, or where it is a new account that was opened and a bank statement cannot be
produced, then an original letter on a letterhead from the bank not older than one month (30
days) confirming the banking details as well as the date on which the account was opened is re-
quired; and
• proof of residential address. This could include a utility account (such as rates and taxes or water
or electricity), account from an educational institution, medical aid statement, telephone account,
e-Toll account – all less than three months old, or a SABC television licence less than one year
old (refer to http://www.sars.gov.za/ClientSegments/Individuals/How-Register-Tax/Pages/Regis-
ter-for-tax.aspx for more details in this regard). Where proof of residence is in the name of a third
party, a CRA01 must be filled in.
You must register for income tax at SARS within 60 days of becoming liable for tax.
As from the 2012 year of assessment, every individual who earns any form of employment income
has to register for income tax. SARS has enabled employers to register their employees with SARS
and to obtain income tax reference numbers on behalf of them; therefore, employees do not have to
go through the process themselves as their employer will inform them of the necessary information
that is required in order to register each employee.
For the 2017 year of assessment, an individual was not required to submit an income tax return if
his/her gross income consisted solely of any one or more of the following:
• remuneration exceeding R350 000 from a single source, and employees’ tax was withheld in
respect of that remuneration;
• interest income from South Africa (excluding a tax-free investment) not exceeding
i R23 800 for a person younger than 65 years of age;
i R34 500 for a person aged between 65 and 75 years of age;
• dividends where the individual was a non-resident throughout the year of assessment;
• amounts received or accrued from a tax-free investment.
The following individuals were required to submit a tax return for the 2017 year of assessment if they
were:
• residents that carried on any trade (that is other than solely as an employee);
• paid or granted a business travel, accommodation or subsistence allowances; or
• granted certain taxable benefits or advantages derived by reason of their employment and whose
gross income exceeded R75 000 (if under 65), R116 150 (if older than 65 but under 75) or
R129 850 (if older than 75 years);
• residents and had capital gains or losses exceeding R40 000;
• not residents and derived any capital gain or loss from the disposal of any asset to which the
Eighth Schedule of the Income Tax Act applies;
• residents and held foreign currency or owned assets outside of South Africa which had a value of
more than R225 000 at any stage during the year;
• residents to whom any income or capital gains could be attributable due to fluctuations in the
value of the South African currency relative to any foreign currency;
• residents that held any participation rights in a controlled foreign company;
• in receipt of gross income that exceeded R75 000 (if under 65), R116 150 (if older than 65 but
under 75) or R129 850 (if older than 75 years); or
• issued with a tax return or requested by SARS to file a return (irrespective of their income).
The requirements for submitting tax returns for 2018 will be announced in a Government Gazette
during 2018.
Every person, once registered with SARS, will receive an income tax reference number. Taxpayers
are required to submit their tax returns annually to SARS during the filing season as announced by
SARS in the Government Gazette (this usually takes place in July). SARS informs taxpayers about the
due date for submission of their tax returns in the media and on its website. For instance, the due
dates for the 2017 tax returns were as follows:

Channel Deadline Type of Taxpayer
Manual – post or at SARS branch drop boxes 22 September 2017 Non-provisional and provisional
eFiling or electronic filing at SARS branch 24 November 2017 Non-provisional
eFiling 31 January 2018 Provisional
It is important that, from 28 February each year, taxpayers start collecting all the information that they
will need to verify the pre-populated income tax return. This means that when the employee receives
an IRP5/IT3(a) from the employer, he or she should file this document in a safe place for a period of
five years from the date that the return was submitted.
Employees who belong to medical funds and/or retirement annuity funds will also receive documen-
tation from these funds verifying the contributions that they have paid to the fund during the year.
From 2017, individuals will need to provide the individual policy number(s) and name(s) of the insur-
er(s) or fund(s) of each retirement annuity fund contribution that he or she makes in the tax return.
Another change to the 2017 tax return is that individuals who receive income as a beneficiary of a
trust(s) must provide details of each trust as well as details about the local and foreign income de-
rived from each of the trusts. An individual is also required to indicate the following information in the
tax return from 2017 in respect of each qualifying person with a disability (see paragraph 2.9.2.2 for
more details in this regard):
• the date of birth of the qualifying person;
• the severity of the disability as per the Confirmation of Diagnosis of Disability certificate (ITR-DD);
• the date when the most recent ITR-DD was completed by a medical practitioner; and
• the medical practice number of the registered medical practitioner who completed the ITR-DD.
Employees who receive interest, dividend or royalty income from investments that they have made
with external parties will receive an IT3-01 form with the IT3(b) certificate option ‘ticked’ from these
banks and/or other investment institutions. SARS will receive two IT3-01 certificates that are related to
the IT3(b) for each tax year (one on 31 October and the other on 31 May) in respect of each taxpayer
who receives any such income. The IT3(b) certificate will detail each taxpayer’s earnings (see the
IT3-01 certificate in Figure 2.3). Other IT3 certificates are also issued; for example, IT3(c) certificates
for proceeds from the sale of unit trusts and other financial institutions, and IT3(e) certificates for
income received by or accrued from the sale or shipment of livestock, produce, timber, ores, min-
erals and precious stones, bonuses and interest paid or accrued to members of co-operative socie-
ties or companies) and IT3(s) certificates that report on the Tax-Free Savings/Investments.
(continued)
(continued)
(continued)
Figure 2.3: A typical IT3-01 form
Taxpayers are categorised by SARS on the basis of the type of income they earn. Individuals who
earn mainly salary income will generally receive an ITR12 from SARS. The information provided by
third parties, for example, salary or interest, is used by SARS to compile (pre-populate) the ITR12
form. The individual is then only required to verify this information and complete the remaining rele-
vant portions of the ITR12 (additional income and deductions, if any), sign it, and submit it to SARS. If
the taxpayer has registered as an eFiler on eFiling (refer to http://www.sarsefiling.co.za/ for more
details), the system will automatically build a tax return specific to that taxpayer, based on the an-
swers that the taxpayer provides to a few questions that SARS includes at the top of the return.
2.7 Annual submission of tax returns

Taxpayers can either submit tax returns manually at their nearest SARS branch, or electronically via
SARS eFiling. SARS introduced an app that allows you to register for eFiling, submit a return (even a
complex ITR12) and reset your password, all via your tablet or smartphone. The SARS Smartphone
App is a mobile application which taxpayers can install from the App Store and Google Play Store on
their mobile device (android phone/tablet or Apple iPhone, iPad/iPad mini and Samsung Gal-
axy/Note), in order to complete and submit their individual Income Tax Returns (ITR12).
Taxpayers wanting to submit their tax returns from a mobile device must first register for SARS eFiling
from an internet-connected PC or laptop at www.sarsefiling.co.za. Once this is done, the taxpayers
can then eFile from their mobile device or tablet by going to https://sarsefiling.mobi or by download-
ing the SARS App from their tablets as set out below.
J For Apple devices, the following steps must be followed to download the SARS
Smartphone App:
1. Open the App store by tapping on the icon on the springboard.
2. Enter ‘SARS eFiling’ into the Search box. Tap on the SARS eFiling App search result.
3. Tap on ‘FREE’.
4. Tap on ‘INSTALL APP’.
5. Enter your Apple ID Password and tap ‘OK’.

6. The app will start loading and install on your mobile device.
7. The SARS eFiling App will be displayed on your springboard.
J For Android devices, you can install the SARS eFiling App from Google Play Store:
1. Open the Play Store by tapping the Play Store tile on your device springboard.
2. Sign into the Play Store using your Google Account.
3. Type ‘SARS eFiling’ into the Search box.

4. The SARS eFiling App icon will now appear in the search results.
5. Tap on ‘FREE’ to start installing the app.
6. Tap on ‘Install’ to continue.
7. Tap on ‘Accept & download’.

8. Once the app is successfully installed, you will be able to open it.
9. You will also be able to access the app from your springboard by tapping on the SARS eFiling icon.
2.7.1 Manual submission

Individual taxpayers submitting a tax return (manually) for the first time must request a tax return by
contacting the SARS Contact Centre on 0800 00 SARS (7277). A SARS Contact Centre agent will
assist the taxpayer to customise the return. Once this is done, the return will be posted by SARS to
the taxpayer. Alternatively, the taxpayer can visit his or her nearest SARS branch to obtain a tax
return. A taxpayer can find out which SARS branch is nearest to him or her by calling the SARS
Contact Centre on the above number or by visiting the SARS website at www.sars.gov.za..
A return can be completed and submitted at any of the SARS branches where a SARS official will
assist the taxpayer to complete and submit his or her return. If the taxpayer contacted the Contact
Centre and received the return by post, then once the taxpayer has completed the return that was
posted to him or her and signed it, he or she must post it back to SARS. Alternatively, the taxpayer
can hand in the completed, signed return at his or her local SARS branch.
Even if you have received your income tax return in the post, you still have the option to
register for eFiling and submit your return electronically.
2.7.2 Electronic submission of returns (eFiling)

Taxpayers who register with SARS for eFiling (refer to paragraph 2.8 for the eFiling registration pro-
cess) will have access to their ITR12, already populated with personal and financial information, on
the eFiling website on an annual basis. The first page of the ITR12 contains a questionnaire that the
taxpayer must complete. This will create all the fields needed to compile a customised tax return. It is
the taxpayer’s duty to ensure that the pre-populated information is correct. The taxpayer may apply
changes where necessary. It is very important that all the mandatory fields are completed – one of
these being the taxpayer’s banking details, as SARS cannot pay a refund without it.
If completing and submitting your tax return is too complicated for you, you have the
choice of using the services of a tax practitioner to assist you with filing your tax return via
eFiling on your behalf. However, you must ensure that you use the services of a tax prac-
titioner who is registered as such with SARS and a recognised controlling body, for ex-
ample with SAIT (the South African Institute of Tax Professionals), SAICA (South African
Institute of Chartered Accountants) or SAIPA (South African Institute of Professional
Accountants). Should a tax practitioner NOT be registered with a recognised controlling
body, that tax practitioner will only be allowed to complete and save the electronic return
on your behalf but will not be able to submit the electronic return to SARS.
It must be noted that even if a taxpayer has not received his or her return in the mail from
SARS, the taxpayer still has a responsibility to request a return from SARS and to com-
plete and submit it to SARS. Failure to do so could result in penalties being incurred and
paid by the taxpayer.
2.8 SARS eFiling

During 2015 99,96% of all returns submitted were filed electronically either via eFiling, representing
51,84%, or through electronically assisted filing at a SARS branch or mobile tax unit.
SARS eFiling is a free, secure, electronic tax return and submission service offered by SARS to
remove the hassle of manual tax returns. In order to register as an eFiling user, taxpayers will need
his or her:
• tax reference number;
• ID number;
• bank account details;
• personal details; and
• date of birth.
The taxpayer must log on to www.sarsefiling.co.za and then click on the ‘register’ icon, after which
the taxpayer must accept the terms and conditions. All the personal information listed above must
subsequently be entered to register as an eFiler (refer to http://www.sars.gov.za/TaxTypes/PIT/Tax-
Season/ITR12/Pages/How-to-eFile-your-tax-return.aspx for the SARS eFiling guide and the step-by-
step procedure to use eFiling).
Figure 2.4: Electronic submission of the ITR12
It is a criminal offence to declare false information, to under-declare income (make

income less than it is), or to exaggerate expenses (to increase expenses). These offences
carry penalties in the form of fines and even jail sentences. It is the responsibility of every
individual to ensure that the information on his or her tax return is true and correct.
The reason for submitting a return to SARS is so that SARS can calculate a taxpayer’s tax liability
based on the income declared and the tax-deductible expenses claimed for a year of assessment.
The following supporting documentation should be kept for five years to support the income and
expenses that are reflected in a tax return, as SARS may require proof of these items:
• your IRP5/IT3(a) certificate(s) which you will receive from your employer;
• medical certificates as well as documents required for amounts claimed in addition to those
covered by your medical aid;
• pension, provident and retirement annuity certificates;
• your banking details;
• travel logbook (if you receive a travel allowance);
• tax certificates that you received in respect of investment income (IT3-01 in respect of the IT3(b));
• completed confirmation of diagnosis of disability (ITR-DD), where applicable;

• information relating to capital gain transactions, if applicable;
• the approved Voluntary Disclosure Programme (VDP) Agreement between yourself and SARS for
years prior to 17 February 2010, where applicable;
• financial statements, e.g. business income, where applicable;
• any other documentation relating to income you received or deductions you want to claim.
Completing a tax return is not a tax calculation and a taxpayer will not be able to see what his or her
tax liability is by merely filling in the tax return. SARS uses the information provided by a taxpayer in
the return to calculate the taxpayer’s liability. So to know what a taxpayer’s tax liability will be, SARS
provides the taxpayer with an income tax notice of assessment.
2.9 Income tax notice of assessment (ITA34)

SARS will process the tax return once the taxpayer submits the ITR12-form, after which SARS will
issue a notice of assessment (ITA34). The time required for issuing the ITA34 will depend on SARS;
no specific time limits are placed on SARS in terms of legislation.
The issued ITA34 will display three different dates: the issue date, the due date and the second date.
The second date is the final date on which the taxation payable, if any, is due and payable to SARS.
On assessment of a taxpayer, SARS takes the ‘gross income’ that the taxpayer earned during the
year into account, then deducts any amounts of gross income that are not taxable according to the
Income Tax Act (exempt income), and also deducts certain deductions that are allowed for in the
Income Tax Act (subject to limitations). After calculating taxable income, SARS calculates normal
tax, based on that taxable income, by using the income tax tables. The normal tax is then reduced
by certain rebates (‘annual’ and ‘medical tax credit’ rebates) to determine the net normal tax pay-
able for the year. Any pre-payments of normal tax made during the year (such as PAYE and provi-
sional tax) are then deducted from the net normal tax to obtain the final amount due by, or refundable
to, the taxpayer. Withholding tax on, for instance, dividends should also be added to tax payable of
the individual when calculating the final tax liability of a person. The following framework contains an
explanation of this calculation.
Table 2.2: Framework for calculating normal tax of a natural person
R
Gross income (as defined in section 1 of the Income Tax Act) xxx
Less: Exempt income (sections 10, 10A and 12T of the Income Tax Act) (xxx)
Equals: Income (as defined in section 1) xxx
Less: Deductions section 11 – but see below; subject to section 23(m) and assessed (xxx)
loss (section 20)
Add: Taxable portion of allowances (such as travel and subsistence allowances) xxx
Equals: Taxable income before retirement fund deduction xxx
Less: Retirement fund deduction (section 11(k)) (xxx)
Add: Taxable capital gain (section 26A) xxx
Less: Donations deduction (section 18A) (xxx)
Equals: Taxable income (as defined in section 1) xxx
Normal Tax calculated, based on the tax tables xxx

Less: Annual rebates (xxx)
Less: Medical tax credits (section 6A, 6B) (xxx)
Equals: Net normal tax liability for the year xxx
Less: PAYE and provisional tax (pre-paid taxes) (xxx)
Equals: Normal tax due by or to the taxpayer xxx
Add: Withholding tax on dividends xxx
Equals: Total tax liability of natural person xxx
2.9.1 Normal tax

Normal tax is a tax based on taxable income and calculated by using the tax tables. The following is
an example to explain the calculation of normal tax by using the tax tables.
EXAMPLE 2.1
Required:
Calculate the normal tax for each of the following taxable incomes in respect of the 2018 year of assessment:
(a) R80 000
(b) R198 600
(c) R97 500
(d) R246 000
(e) R334 987
(f) R777 890
Solution
Part A
Refer to Schedule A for the tax tables, which consist of seven different income levels. Each income level
indicates an amount of tax, as well as a percentage (except for the first level, where there is only an applica-
ble percentage).
In calculating the tax on R80 000, one finds that R80 000 is less than R189 880 and it, therefore, falls into the
first level of income. At this level, the table indicates tax levied at 18%. Therefore, the normal tax on R80 000
will be:
R80 000 × 18%

= R14 400
Part B
In calculating the tax on R189 600, one finds that R189 600 falls into the category R189 881 – R296 540. At
this level, the table shows that the normal tax will consist of R34 1780 (as per table) + 26% of any amount
over R189 880. This means that one will have to first do a calculation to see by how much the amount (in this
case R198 600) exceeds R189 880.
Therefore, R198 600 – R189 880 (as per table) = R8 720. The table indicates that this excess amount will
attract 26% tax, therefore, the calculation is R8 720 × 26% = R2 267.20. Remember to add the amount given
in the table.
Therefore, the normal tax on R198 600 will be:
R34 178 (as per table) + (R198 600 – R189 880[as per table] × 26%)
= R34 178 + R2 267,20
= R34 445,20
Apply the tax tables to (c) to (f); refer to the answers in the solution section at the back of the book.
2.9.2 Rebates
2.9.2.1 Annual rebates
Once the normal tax has been calculated, the rebates (as determined each year by the Minister of
Finance) are deducted from this amount.
For the 2018 year of assessment, the rebates can basically be split into two distinct types; the first
being the ‘annual’ rebates and the second being the ‘medical’ rebates (consisting of the ‘medical
scheme fees tax credit’ and the ‘medical expenses tax credit’). The ‘annual’ rebates are as follows:
• Primary rebate = a rebate of R13 635 is allowed for all taxpayers (irrespective of their age)
against normal tax payable;
• Secondary rebate = taxpayers who are 65 years but less than 75 years old on the last day of the
year of assessment (28 February 2018) are allowed an additional secondary rebate of R7 479.
This means that if a taxpayer is 65–74 years old, he or she qualifies for a total rebate of R21 114
(R13 635 + R7 479);
• Tertiary rebate = taxpayers who are 75 years of age or older, in addition to the primary and
secondary rebates, are allowed a tertiary rebate of R2 493. This means that if a taxpayer is 75 or
older, he or she qualifies for a total rebate of R23 607.
To summarise, the total cumulative ‘annual’ rebate that is deductible from the normal tax payable is
dependent on the age of the taxpayer, and is as follows:
• taxpayer less than 65 years of age = R13 635;
• taxpayer 65–74 years of age = R21 114; and
• taxpayer 75 years or older = R23 607.
A taxpayer will receive a full rebate even if he or she does not work for a full year, but
these rebates are apportioned in the year in which a person is born or dies. When a
person dies during the year and it must be determined whether a person qualified for the
secondary and tertiary rebates, one must use the age the taxpayer would have been on
28/29 February. That is, for instance, if a taxpayer died on 5 January at the age of 64, but
the taxpayer’s birthday would have been on 29 January (he would have turned 65), the
taxpayer would be entitled to the secondary rebate despite the fact that he never made it
to his birthday. The rebate would, however, have to be apportioned as mentioned above.
The apportionment would be done as follows:
R21 114 × 311/365 = R17 990.
As the taxpayer was only alive for 311 out of the 365 days of the year (1 March–5 Janu-
ary), only this proportion of the total rebate can be used to reduce his/her tax payable.
Please note: If the year of assessment is a leap year, as was the case in 2016, then there
are 366 days in the year (not 365 as used in the above calculation). This is important
when doing the above apportionment calculation and other calculations that use the
number of days in the year as a basis for the calculation.
Also note: Rebates cannot create a refund to the taxpayer.
EXAMPLE 2.2
Required:
Calculate the net normal tax for the following taxpayers (round your answer off to the nearest rand):
(Note: As you have not yet learnt about medical tax credits, ignore them for this question.)
(a) Taxable income R299 300, age 54
(b) Taxable income R197 000, born on 2 February 1960
(c) Taxable income R90 000, age 65
(d) Taxable income R55 000, age 70
(e) Taxable income R298 900, born on 15 December 1934
(f) Taxable income R450 000, age 34
(continued)
Solution
Part A
First, calculate the normal tax on R299 300. The tax tables given as annexure A indicate that R299 300 falls
into the income level R296 541 – R410 460.
The table indicates that the normal tax will consist of R61 910 + 31% of the amount above R296 540. The
excess amount, therefore, is:
R299 300 – R296 540 (as per table) = R1 700
Therefore, the calculation of normal tax on R299 300 is as follows:

= R61 910 + [(R299 300 – R296 540) × 31%]
= R61 910 + R856
= R62 766
To calculate net normal tax, reduce the normal tax with the annual rebates:
The taxpayer is younger than 65 years of age on 28 February 2017 and is, therefore, only entitled to the pri-
mary rebate of R13 635.
The net normal tax on R299 300 is:

= R62 766 (normal tax) – R13 635 (primary rebate)
= R49 131
Apply the tax tables to (b) to (f); refer to the answers in the solutions section at the back of the book.
2.9.2.2 Medical tax credits

The second type of rebate is the ‘medical’ rebate. As mentioned above, this rebate consists of the
‘medical scheme fees tax credit’ and the ‘medical expense tax credit’. Before the difference between
the two rebates is explained, the history of these rebates will briefly be discussed.
In the past, individuals were entitled to a deduction in their tax calculation for their medical expenses in-
curred (subject to certain limits). This medical deduction system has been converted over the last few
years into a credit or rebate system.
Deduction vs rebate:
A deduction reduces a taxpayer’s taxable income, thereby decreasing the tax calculated
per the relevant tax rate.
A rebate (or tax credit) reduces the normal tax owing to SARS. In other words, the med-
ical rebates do not reduce the taxable income, but will reduce the tax calculated per the
relevant tax rate. It therefore works in the same way as the annual rebates.
The value of the medical credit is unrelated to the taxpayer’s income tax bracket and SARS, there-
fore, considers it as more fair (or equitable). All individuals are subject to the credit system. The two
types of medical tax credits will now be discussed separately.
Rebate 1: The medical scheme fees tax credit (MSFTC)

This rebate applies to all individuals, regardless of their age or disability status. The only requirement
is that the person must be a member of a registered medical scheme. The medical tax credit is non-
refundable. In other words, the taxpayer will not get a refund from SARS if the medical tax credit
exceeds the tax owing to SARS. The tax credit (per month) in respect of medical fund contributions
for the 2018 year of assessment is as follows:
• R303 per month in respect of the taxpayer; plus
• R303 per month for one dependant; plus
• R204 per month for each additional dependant.
The medical scheme fees tax credit may vary from time to time and changes will be
announced by the Minister of Finance during the annual Budget Speech.
The MSFTC is not refundable, and cannot exceed the amount of tax to be deducted.
EXAMPLE 2.3
Required:
Determine the amount of the medical scheme fees tax credit that Sarah is entitled to in respect of her medical
fund contributions for the 2017 year of assessment.
Information:
Sarah Wheeler, 45 years of age, paid monthly contributions of R2 500 to Mestbed, a registered medical fund,
in respect of herself, her husband and their two children.
Solution
R R
Sarah’s contributions for the year (R2 500 × 12 months) 30 000
The medical scheme fees tax credit is calculated as follows:

Sarah (R303 × 12 months) 3 636
Husband (R303 × 12 months) 3 636
Two children (R204 × 2 × 12 months) 4 896
12 168
Sarah is, therefore, entitled to deduct R12 168 as a rebate (the medical scheme fees tax credit) from the
normal tax payable by her for the 2018 year of assessment. Note that the R12 168 is not claimed as a deduc-
tion in her taxable income calculation.
The calculation would be exactly the same if Sarah (or her husband, or any of their children) had a disability
or a physical impairment. Also, Sarah’s age is irrelevant for the calculation of the medical scheme fees tax
credit.
EXAMPLE 2.4
Required:
Calculate the net normal tax for the following taxpayers who all belong to a medical fund and make monthly
contributions to this fund in respect of themselves, their spouse (a dependant) and one child (a dependant):
(a) Taxable income R299 300, age 54

(b) Taxable income R197 000, born on 2 February 1960
(c) Taxable income R54 000, age 65
(d) Taxable income R40 000, age 70
(e) Taxable income R298 900, born on 15 December 1934
(f) Taxable income R450 000, age 34
(continued)
Solution
Part A
First, calculate the normal tax on R299 300. The tax tables (refer to annexure A) are once again applied and
the tax is calculated in the same way as per Example 2.2 above.

= R61 910 + [(R299 300 – R189 880) × 31%]
= R61 910 + R856
= R62 766
To calculate net normal tax, first reduce the normal tax with the annual rebates, and then reduce the result
with the medical scheme fees tax credit:
Annual rebate:
The taxpayer is younger than 65 years of age on 28 February 2018 and is, therefore, only entitled to the pri-
mary rebate of R13 635.
Medical scheme fees tax credit:

The taxpayer is younger than 65 years of age, but age is irrelevant for the medical scheme fees tax credit as
it is available to all taxpayers no matter what their age as long as they contribute to a medical fund. The med-
ical scheme fees tax credit is calculated as follows:
J R303 per month for 12 months in respect of the taxpayer + R303 per month for 12 months in respect of
his or her spouse (first dependant); plus
J R204 per month in respect of his or her child (additional dependant)
Therefore, the total MSFTC is R9 720 [(R303 × 2 × 12 months) + (R204 × 1 × 12 months)]

The final net normal tax payable by the taxpayer:
= R62 766 (normal tax) – R13 635 (primary rebate) – R9 720 (medical tax credit)
= R39 411
Apply the tax tables and the rebates to (b) to (f); refer to the answers in the solution section at the back of the
book.
Rebate 2: The additional medical expenses tax credit [METC]

Certain excess medical scheme fees and out-of-pocket medical expenses will also qualify for an
additional medical expenses tax credit.
The ‘excess’ medical scheme fees referred to above is the amount by which the medical scheme
fees paid by a taxpayer to a medical fund exceeds the MSFTC. If there is no excess or the calcula-
tion results in a negative amount, the ‘excess’ is then limited to Rnil. The METC is also non-
refundable. The METC distinguishes between three categories of taxpayers.
(i) Individuals aged 65 or older
METC = Step 1 + Step 2
Step 1: 33,3% × [medical scheme fees paid – (3 × MSFTC)]
Step 2: 33,3% × qualifying medical expenses
(ii) Individual or his or her spouse or his or her child has a disability
Step 1: 33,3% × [medical scheme fees paid – (3 × MSFTC)]
Step 2: 33,3% × qualifying medical expenses
Note: The calculation for this category is the same as for the first one.
(iii) All other cases (i.e. younger than 65 and no disability)

METC = 25% × [Step 1 + Step 2 – Step 3]
Step 1: Medical scheme fees paid – (4 × MSFTC)
Step 2: Qualifying medical expenses
Step 3: Taxable income × 7,5%
The 7,5% is calculated on the taxable income amount, after all deductions have been claimed.
Should the answer to the calculation in Step 1 + Step 2 – Step 3 result in a negative value,
then that amount in the calculation of the METC is limited to Rnil.
In the year in which a taxpayer receives a retirement fund lump-sum benefit (on/after
1 October 2007), or a retirement fund lump-sum withdrawal benefit (on/after 1 March
2009), the taxable income of the taxpayer must first be reduced by these lump sums
before the 7,5% is calculated.
EXAMPLE 2.5
Required:
Calculate the net normal tax for Tammy Trainer (aged 42) who belongs to a medical fund and makes monthly
contributions to this fund in respect of herself, her spouse (a dependant) and two children (both dependants).
She paid R72 000 to the medical scheme during the 2018 year of assessment and she also incurred and paid
for qualifying medical expenses of R14 000 during this year. Her taxable income is R299 300 after taking into
account her donation to a qualifying Public Benefit Organisation.
Solution
First, calculate the normal tax on R299 300. The tax tables (refer to annexure A) are once again applied and
the tax is calculated in the same way as per Example 2.2 above.

= R61 910 + [(R299 300 – R296 540) × 31%]
= R61 910 + R856
= R62 766
To calculate net normal tax, first reduce the normal tax with the annual rebates, and then reduce the result
with the medical tax credits:
Annual rebate:
Tammy Trainer is younger than 65 years of age on 28 February 2018 and is, therefore, only entitled to the
primary rebate of R13 635.
Medical scheme fees tax credit (MSFTC):

The medical scheme fees tax credit is calculated as follows for her:
J R303 per month for 12 months in respect of the taxpayer + R303 per month for 12 months in respect of
J R204 per month in respect of his or her child (additional dependant).
Therefore, the total medical tax credit is R12 168 [(R303 × 2 × 12 months) + (R204 × 2 × 12 months)]
As Tammy also incurred and paid for qualifying additional medical expenses, she is also entitled to an addi-
tional medical expense tax credit.
(continued)
Medical expense tax credit (METC):

Tammy is younger than 65 years of age, and the additional medical expense tax credit is calculated as fol-
lows for her:
METC = 25% × [Step 1 + Step 2 – Step 3]

Step 1: Medical scheme fees paid – (4 × MSFTC)
METC = 25% × [(R72 000 – (4 × R12 168)) + R14 000 – (R299 300 × 7,5%)]
= 25% × [(R72 000 – R48 672) + R14 000 – R22 448]
= 25% × [R23 328 + R14 000 – R22 448]
= R3 720
The final net normal tax payable by Tammy is:

= R62 766 (normal tax) – R13 635 (primary rebate) – R12 168 (MSFTC) – R3 720 (METC)
= R33 243
The various types of medical expenses that would qualify for the rebate are stipulated in the Income
Tax Act. There are also strict requirements that must be met in order to qualify for the ‘disability’
category. These will be discussed below.
Qualifying expenses
Medical expenses can take the form of contributions to a medical fund (or scheme) and/or other
expenses, for example, payments to registered doctors and nurses, as well as payments for medi-
cines on prescription (called qualifying expenses). Examples of qualifying expenses are as follows:
• any amounts paid to a registered medical practitioner, dentist, optometrist, homeopath, naturo-
path, osteopath, herbalist, physiotherapist, chiropractor or orthopaedist for professional services
rendered or medicines supplied;
• any amounts paid to a registered nursing home or hospital or enrolled nurse, midwife or nursing
assistant in respect of illness or confinement;
• any amounts paid to a registered pharmacist for medicines supplied on the prescription of any
person mentioned in point 1 above;
• any amounts in respect of expenditure incurred outside the Republic on services rendered or
medicines supplied; and
• any expenditure that is prescribed by the Commissioner, necessarily incurred and paid by the
taxpayer because of any physical impairment or disability suffered by the taxpayer, his or her
spouse or child, or any dependant of the taxpayer.
The taxpayer may add these qualifying expenses if they were incurred and paid in
respect of the taxpayer, his or her spouse, child or dependant. In other words, the person
paying the expense is the one who may add it to his or her own medical deduction calcu-
lation.
A ‘dependant’ (as defined in the Income Tax Act) in relation to a taxpayer means:
• his or her spouse;
• his or her child and the child of the spouse;
• an immediate family member in respect of whom the taxpayer is liable for family care
and support; and
• any other person recognised as a dependant of that taxpayer in terms of the rules of
the medical scheme.
Some employers contribute towards a medical fund on behalf of their employees. The taxation treat-
ment of this type of payment will be dealt with under chapter 6 (fringe benefits), but in essence, any
such payment made by an employer is regarded as a fringe benefit. It must be mentioned that this
fringe benefit is deemed to be a payment (contribution) made by the employee. Thus contributions
paid by the taxpayer and the taxpayer’s employer, in respect of him/herself, his or her spouse and his
or her dependants, may be taken into account to determine the medical scheme fees tax credit.
Contributions on behalf of a spouse or children can only be taken into account in the taxpayer’s own
tax return.
If the medical aid has refunded (or reimbursed) the taxpayer for any expenses incurred, then the
taxpayer may not add this expense to his or her qualifying expenses. In other words, only the tax-
payer’s ‘out-of-pocket’ expenses will be taken into account. The following medical expenses may be
regarded as qualifying out of pocket medical expenses:
• expenses paid in respect of medical services and prescribed medical supplies; and
• other expenditure necessarily incurred and paid in consequence of any physical disability.
Person with a disability

The type of disability envisaged above, is any impairment to the body or mind that results in a mod-
erate to severe limitation on a person’s ability to perform daily functions (e.g. disability in respect of
vision, hearing, speech or a physical, intellectual or mental disability). Physical impairment is distin-
guished from disability by the fact that the severity of its effects can be overcome by a device or be
corrected through therapy. ‘Moderate to severe limitation’ means a significant restriction on a per-
son’s ability to function or perform one or more basic daily activities after maximum correction. Maxi-
mum correction, in this context, means appropriate therapy, medication and use of devices.
Certain minimum guidelines have been set by SARS for a person to be classified as a person with a disability.
For instance, the minimum requirement for a person to be classified as a blind person is as follows:
J visual acuity = in the better eye with the best possible correction, less than 6/18 (0,3); and
J visual field = 10 degrees or less around central fixation.
‘6/18’ means that what a person with normal vision can read at 18 metres, the person being tested can only
read at 6 metres. ‘Best possible correction’ refers to the position after a person’s vision has been corrected
by means of spectacles, contact lenses or intraocular (implanted) lenses.
For income tax purposes, a person may be diagnosed as permanently or temporarily disabled. In the
case of permanent disability, the diagnosis by a duly qualified medical practitioner – specifically
trained to deal with the applicable disability – will be valid for five years; in the case of temporary dis-
ability, it will be valid for a year. With regard to the tax treatment of any qualifying expenses incurred
by a disabled person, SARS has issued a list of qualifying physical impairment or disability expendi-
ture and diagnosis criteria in terms of a disability. This extensive list of qualifying expenses is not
comprehensive; it merely identifies broad categories of qualifying expenses, and provides examples
of claimable expenses.
On the other hand, it should be cautioned that just because an expense is included in SARS’ pre-
scribed list, it does not mean that it will automatically qualify as a deduction. The overall requirement
for a disability-related expense is that it should be necessarily incurred as well as incurred in conse-
quence of the disability. For example, the cost of a hand-held GPS could be a qualifying expense for
a visually impaired person, but not for a person in a wheelchair. This list includes all the broad cate-
gories listed on the SARS ‘List of qualifying physical impairment or disability expenditure’. The broad
categories included on this list are as follows:
• attendant care expenses;
• travel and other related expenses;
• insurance, maintenance, repairs and supplies;
• prosthetics;
• aids and other devices (excluding motor vehicles, security systems, swimming pools and other
similar assets);
• services;
• continence products;
• service animals;
• alterations or modifications to assets acquired or to be acquired.
The person with a disability must obtain a confirmation of his or her disability from a registered health
practitioner in order to claim the qualifying expenditure as a tax deduction. This confirmation must be
done on an ITR-DD form. The taxpayer should not submit this form to SARS together with his or her
tax return, but must keep it for audit purposes or for if SARS should request it. This form contains
details of the minimum guidelines that have been set by SARS for a person to be classified as a
person with a disability.
(continued)
Figure 2.5: An ITR-DD form

A taxpayer can either be disabled or physically impaired.

If the taxpayer is disabled (i.e. there is a moderate to severe limitation on the person’s
ability to function or perform daily activities), his or her qualifying medical expenses are
deductible under the second category of the METC.
If the taxpayer is physically impaired (i.e. there is less than a moderate to severe limita-
tion on the person’s ability to perform daily activities after maximum correction), his or her
qualifying medical expenses are deductible under the third category of the METC.
EXAMPLE 2.6
Required:
Determine how much of Heidi’s medical expenses will qualify as qualifying expenses for the purposes of the
additional medical expenses tax credit in the current year of assessment.
Information:
Heidi Blinder, 32 years of age, has been blind for the last two years and has been diagnosed as such by her
registered medical practitioner in accordance with the criteria prescribed by the Commissioner (i.e. she is
permanently disabled). During the tax year, she paid R3 500 for a hand-held GPS that verbally provides her
with directions. She also paid R5 900 for a guide dog and R2 100 for veterinary care for this guide dog. She
requires all of these items/services in order to function and perform daily activities.
Solution
As Heidi is permanently disabled – that is, she has a moderate to severe limitation on her ability to function or
perform daily activities, this limitation has lasted for more than a year, and she has been diagnosed by a duly
registered medical practitioner in accordance with the criteria prescribed by the Commissioner. Heidi can
claim all her expenses as part of the METC (subject to the limit as discussed above) as long as these were
necessarily incurred and paid for in consequence of her physical disability and if it appears under one of the
categories of expenses contained on the list of qualifying expenses.
Expenses incurred (all on qualifying list and meet above requirements): R

J GPS purchased (aids & other devices) 3 500
J Guide dog purchased (service animal – specifically trained to be used 5 900
as an aid for daily functioning)
J Guide dog veterinary care (service animal) 2 100
Total qualifying expenses 11 500
All of these expenses were incurred in order for her to function and perform her daily activities and can thus
be included for the purpose of the calculation of the METC.
EXAMPLE 2.7
Required:
Calculate the net normal tax payable by Joshua in respect of the 2087 year of assessment.
Information:
Joshua Walkingstick is 55 years of age and married out of community of property to Jeanette. They have
three children under the age of 18. The medical fund covers the whole family.
Joshua’s taxable income amounted to R310 000. Joshua did not receive any retirement fund lump-sum bene-
fits or withdrawal benefits during the 2018 year of assessment.
Joshua paid the following medical expenses for the year:

R
Contributions to a registered medical fund 68 000

Hospital expenses not covered by the medical fund 20 800
Pharmacy accounts for prescribed medicines not covered by the medical fund 2 700
Solution
R
Taxable income 310 000
Tax per the 2018 tax table ((R310 000 – R296 540) × 31% + R61 910) 66 083
Less: Primary rebate (13 635)
Less: Medical scheme fees tax credit (note 1) (14 616)
Less: Additional medical expenses tax credit (note 2) (2 447)
Net normal tax payable 35 385
Note 1: Medical scheme fees tax credit

J Joshua (R303 × 12 months) 3 636
J Wife (R303 ×12 months) 3 636
J Three children (R204 × 3 × 12 months) 7 344
14 616
Note 2: Additional medical expenses tax credit [METC]
Joshua falls in the third category
METC = 25% × [Step 1 + Step 2 – Step 3)]
Step 1: Medical scheme fees paid –

(4 × medical scheme fees tax credit) R68 000 – (4 × R14 616) = R9 536
Step 2: Qualifying medical expenses R20 800 + R2 700 = R23 500
Step 3: Taxable income × 7,5% R310 000 × 7,5% = R23 250
METC = 25% × (R9 536 + R23 500 – R23 250) = R2 447
2.9.3 Net normal tax

Once the normal tax has been calculated, and the rebates have been subtracted from this amount,
the result is the net normal tax payable and represents the amount that the person is liable to pay
over to SARS for that particular year of assessment. The net normal tax can never be negative. If the
rebates are more than the normal tax, the taxpayer does not owe SARS any income tax for the year.
2.9.4 Final tax liability

A taxpayer has to calculate his or her final tax liability at the end of the year of assessment. However,
where the person earns a salary, the employer will already have deducted employees’ tax from the
person’s salary on a monthly basis. This employees’ tax (refer to chapter 8 for more details) is a pre-
payment of a taxpayer’s final tax liability. Unlike the final tax liability, which is calculated at the end of
the tax year, employees’ tax is calculated by the employer on a monthly basis and is basically a pre-
payment of a taxpayer’s final tax liability. The employees’ tax that has already been deducted, and
paid over to SARS on a monthly basis, must be taken into account at this point of the assessment.
This means that where employees’ tax has been paid over to SARS, the taxpayer has already made
pre-payments towards the net normal tax liability.
EXAMPLE 2.8
Required:
Calculate the final tax liability of the taxpayer (younger than 65 years of age; a member of a medical scheme;
has no dependants and incurred no additional medical expenses) in the following situations. You may as-
sume that there were no excess medical contributions:
Taxable income Employees’ tax paid
R R
(a) 102 530 800
(b) 98 900 5 560
(c) 135 987 20 060
(d) 265 000 43 060
(e) 786 900 36 285
Solution
Part A
First, calculate normal tax by using the tax tables:
As the taxable income is less than R189 880, normal tax is calculated at 18%, therefore
= R102 530 × 18%
= R18 455 (rounded off to the nearest rand)
To calculate the net normal tax, reduce the normal tax by the annual rebate and medical tax credit:
= R18 455 – R13 635 (primary rebate) – R3 636 (medical tax credit: R303 × 12 months)
= R1 184
To calculate the final tax liability, take any pre-paid taxes into account:
= R1 184 – R800 (employees’ tax)
= R384 payable to SARS.
The final tax, as calculated, is more than the employees’ tax that was deducted by the employer during the
year; therefore, the amount of R383 is payable by the taxpayer to SARS.
Part B
First, calculate normal tax by using the tax tables:
As the taxable income is less than R189 880, it will be taxed at 18%:
= R98 900 × 18%
= R17 802
To calculate the net normal tax liability, reduce this amount by the annual rebate and medical tax credit:
= R17 802 – R13 635 (primary rebate) – R3 636 (medical tax credit: R303 × 12 months)
= R531
To calculate the final tax liability, take any pre-paid taxes into account:
= R8531 – R5 560 (employees’ tax)
= (R5 029) (refund due to taxpayer by SARS)
The final tax, as calculated, is less than the employees’ tax deducted by the employer during the year; there-
fore, a refund is due to the taxpayer.
(continued)
It is VERY important to state whether the final tax liability represents an amount owing to SARS or
whether SARS needs to refund the taxpayer, as this makes a big difference. If the final tax liability
is negative, it means that too much tax has been pre-paid, and SARS must give it back to the
taxpayer (a refund is, therefore, due to the taxpayer from SARS).
If the final tax liability is positive, it means that the taxpayer has not paid enough pre-paid taxes
(PAYE) to cover the tax required by SARS for the year. The additional amount must be paid over to
SARS by the second date on the ITA34.
Where the taxpayer has tax-deductible expenses that the employer was not entitled to take into account when
calculating employees’ tax, the employer might have deducted too much employees’ tax over the year in
comparison with the net normal tax liability. In this situation, SARS will refund the overpayment of tax to the
taxpayer.
Apply the tax tables to (c) to (e); refer to the answers in the solution section at the back of the book.
Where the taxpayer has earned some income other than from employment, for example, interest or
rental income, the employer would not have made provision for tax, in terms of the employees’ tax
system, in respect of that income. The employer would not even be aware that the employee earned
this income. The result, at the end of the year, will be that the employees’ tax paid in respect of that
taxpayer will be less than the net normal tax liability calculated by SARS, and the taxpayer will have
to pay over some more tax to SARS. This situation is often rectified by SARS requiring that the tax-
payer, in terms of the Income Tax Act, register as a provisional taxpayer (refer to chapter 8 for more
details).
Provisional tax is basically also a pre-payment towards the taxpayer’s net normal tax liability. A tax-
payer will make two provisional tax payments during a tax year. These payments are, therefore, also
treated as deductions from the normal tax payable. Should these two provisional payments not ex-
ceed the normal tax payable (i.e. an amount is still payable), the taxpayer will need to make an addi-
tional (top-up/third) provisional tax payment. Should these two provisional payments exceed the
normal tax payable for the year, the taxpayer will be entitled to a refund from SARS.
Dividends withholding tax

A withholding tax of 20 per cent is payable on the amount of a dividend paid by a company. A natu-
ral person who is resident in South Africa and who receives a dividend will receive that dividend net
of dividends tax (that is the cash amount received in the taxpayer’s bank account will be after the
dividends tax has been deducted). For example, if the gross dividend declared is R100, a withhold-
ing tax of R20 will be deducted and paid over to SARS. The net dividend of R80 is paid into the
taxpayer’s bank account.
Dividends tax is a withholding tax as it should be withheld and paid to SARS by the company paying
the dividend or by a regulated intermediary (i.e. a withholding agent interposed between the compa-
ny paying the dividend and the beneficial owner), and not the person liable for the tax (i.e. the bene-
ficial owner of the dividend – in this case, the natural person taxpayer).
Individuals receiving dividend payments are not responsible for submitting any information to SARS.
The company or regulated intermediary paying the dividend administers this aspect. The only re-
quirement would be for the taxpayer to declare the gross dividend received/receivable in the taxpay-
er’s annual Income Tax Return (ITR12).
2.10 Review of the notice of assessment (ITA34)

When a taxpayer receives the notice of assessment (ITA34) from SARS, he or she should immediately
review the assessment against his or her preliminary calculations. Where the information is correct,
the taxpayer need not take any action other than to pay any amount due, or to wait for SARS to make
any applicable refund.
SARS sometimes omits (leaves out) certain amounts when the data is captured, and this results in
incorrect amounts being refunded by SARS, or the taxpayer having to pay more tax to SARS. In this
instance, taxpayers can complete a ‘Request for Correction’ form for individuals (refer to the example
below). For eFilers, this form will automatically appear on the eFiling system and the taxpayer merely
needs to click on the button to open the form for electronic completion and submission.
However, where the taxpayer’s calculations do not agree with the SARS assessment and the taxpay-
er is certain that it is due to an error on the part of SARS, an objection should be prepared as soon as
possible.
Before submitting an objection, but especially in cases where the taxpayer is not certain how SARS
arrived at the amounts (or certain amounts) in the assessment, it is advisable that a taxpayer first
submit a request to the Commissioner for reasons for the assessment. Before 2017 there was no
prescribed form on which to submit this request, so a written letter addressed and sent to SARS had
to suffice. From 2017, a Request for Reason form is available electronically on e-filing. This form must
be lodged/sent to SARS within 30 days from the date of the assessment for it to be valid.
If a taxpayer does not accept the reasons supplied by SARS, or he or she disagrees with the
assessment (ITA34), this taxpayer is entitled to lodge an objection with SARS as a next step. This
objection must be lodged within the 30 days from either the date of the objection, or where reasons
were requested, within 30 days from the date the reasons were received. The applicable form to be
completed in this instance is a ‘Notice of Objection’ form (NOO1) for individuals (see an example of
this form below). For eFilers, this form will automatically appear on the eFiling system and the taxpay-
er merely needs to click on the button to open the form for electronic completion and submission.
For taxpayers not on eFiling, the taxpayer must submit a manually-completed NOO1 form to the
SARS office where the taxpayer is registered for the applicable tax, or the address for objection
specified in the assessment. It is important that the taxpayer sign the objection, and specify in detail
the grounds upon which he or she is making the objection. If the taxpayer is registered for eFiling, he
or she can complete and submit this form electronically on the eFiling system. Usually, at this point,
the taxpayer and SARS will agree, and settle the matter.
However, if the matter is not settled with SARS at this point, the taxpayer is allowed to appeal against
SARS’ decision; this may involve the courts (refer to chapter 1), but the alternative dispute resolution
(ADR) process can allow for the resolution of tax disputes outside the litigation arena. The ADR
process is less formal and expensive than the court process and allows disputes to be resolved
within a much shorter period.
Figure 2.6: ’Request for Correction’ form for individuals

2.11 Penalties
As mentioned earlier, the law requires that certain taxpayers register for income tax. In addition,
employers need to register with SARS for employees’ tax purposes and certain businesses must
register for VAT. In the event of non-compliance with these requirements, the Commissioner may
impose administrative penalties prescribed in terms of the Tax Administration Act 28 of 2011.
These penalties are discussed in detail in chapter 8.
2.12 Summary
During a 12-month period, an employed person will earn a salary at the end of each month. Certain
deductions, including employees’ tax, will reduce this salary before the employer pays it to the
employee. All this information will be indicated on the employee’s payslip.
After 28/29 February each year, the employee will receive an IRP5/IT3(a) from the employer, indicat-
ing all the income that was earned for the 12-month period or year of assessment.
Where the employee is a registered taxpayer, he or she will receive an income tax return from SARS.
This return must be completed correctly, indicating all income earned (not only from employment, but
from other sources as well); the taxpayer is also entitled to indicate certain expenses or deductions.
After submitting the return to SARS, the taxpayer will receive an assessment indicating whether he or
she owes SARS more tax, or whether SARS should refund tax that has been overpaid.
In the event that the tax liability calculation is incorrect because of a mistake by SARS, there are
procedures that the taxpayer may follow in order to resolve the dispute. These procedures are often
referred to as objection and appeal procedures.
Diagrammatically, the process can be illustrated as follows:
Work for a month; earn a salary at end of month
Get a payslip – Employees’ tax and other contributions to funds that em-
ployee belongs to deducted from salary – what is left of the salary is de-
posited into the employee’s bank account
Employer pays the tax that was deducted over to SARS
End of year, employee receives an IRP5/IT3(a) from the employer
Register as a taxpayer in first year that this happens
Register as a provisional taxpayer (if necessary) and pay provisional tax on

due dates
Obtain a pre-populated ITR12 return and submit it online or manually before

final date
SARS will use the information to assess the taxpayer and will issue an ITA34
via eFiling/mail
Correct – taxpayer either Incorrect – taxpayer asks

receives the amount indi- for reasons, completes a
cated or has to pay in addi- request for correction form
tional tax and/or objects via NOO1
As mentioned previously, completing a tax return does not provide an individual with the amount
owed to or by SARS, that is, the return is not a tax calculation. The return only provides SARS with the
information for SARS to do the tax calculation for each taxpayer. So how does one calculate the tax
due to or from SARS? Well, the calculation of tax owing to or by SARS can be illustrated diagrammat-
ically as follows:
Calculation of taxable income
Gross income (chapter 4)

Less: Exempt income (chapter 4)
Equals: Income
Less: General deductions (chapter 5)

Less: Specific deductions in order (chapter 3)
Equals: Taxable income
Calculation of tax liability for the year of assessment
Apply tax tables to taxable income
Equals: Normal tax
Less: Rebates (annual and medical)

• Primary: R13 635
• Secondary: plus R7 479 for 65 and older
• Tertiary: plus R2 493 for 75 and older
• Medical scheme fees tax credit (MSFTC):
• R303 per month for taxpayer (younger than 65) and R303 for first
dependant, plus R204 per month for each additional dependant
• Additional medical expenses tax credit (METC):
• Person 65 years or older or disabled
• 33% × [medical contributions paid – (3 × MSFTC)] plus 33% × qualify-
ing medical expenses
• Person younger than 65 years
• 25% × [(medical contributions paid – (4 × MSFTC) plus qualifying
medical expenses) – (7,5% × taxable income)]
Equals: Net normal tax
Less: Prepaid taxes

• Employees’ tax (PAYE)
• Provisional tax
Equals: Tax liability
Add: Dividends withholding tax
Equals: Final Tax liability

SARS owes taxpayer (refund) / Taxpayer owes SARS

1. What should an employee receive from his or her employer at the end of each month?
2. Name the types of deductions that can reduce a person’s salary before the employer pays it into
his or her bank account.
3. When does the tax year end for individuals?
4. What certificate will an employee receive from his or her employer at the end of each tax year,
and what information will be shown on this certificate?
5. What is employees’ tax?
6. Who is liable for income tax?
7. Who has to register for income tax purposes?
8. What is an income tax assessment?
9. Calculate net normal tax on R498 650 for a person who is 33 years old and the sole member of a
medical fund during the full year. The taxpayer’s total contributions to the medical fund amount-
ed to R45 000 and the taxpayer also incurred and paid for additional qualifying medical expens-
es of R8 500.
10. Calculate net normal tax on R489 970 for a person who is 66 years old and the sole member of a
medical fund during the full year The taxpayer’s total contributions to the medical fund amounted
to R75 000 and the taxpayer also incurred and paid for additional qualifying medical expenses of
R17 000.
11. Explain what is meant by ‘final tax liability’.
12. Explain what should happen if the taxpayer’s tax assessment does not agree with his or her
original calculations.
13. Is there a time limit to the answer provided in question 12 above?
Answers
Answers
CHAPTER
3 Calculating Taxable Income

Author: L Steenkamp
Contents
Page
3.1 Introduction ........................................................................................................................... 60
3.2 Gross income ........................................................................................................................ 61
3.3 Exempt income ..................................................................................................................... 61
3.4 Deductions for salaried taxpayers ........................................................................................ 62
3.4.1 Income protection contributions ............................................................................... 63
3.4.2 Retirement fund contributions................................................................................... 63
3.4.3 Donations to public benefit organisations ................................................................ 67
3.5 Summary ............................................................................................................................... 69
59

9 calculate taxable investment income.
9 apply the correct order in which deductions are allowable.
9 calculate the allowable deduction in respect of income protection premiums.
9 calculate the allowable deduction in respect of retirement fund contributions.
9 calculate the allowable deduction for donations to approved bodies.
3.1 Introduction
This chapter highlights how SARS makes use of the information contained in the income tax return to
calculate taxable income. Once SARS has calculated taxable income, the tax liability of the taxpayer
can be calculated.
R
loss (section 20)
Less: Retirement fund deduction (section 11(k)) (xxx)

In this chapter, the focus is on items generally included in a salaried taxpayer’s gross income, the
term ‘exempt income’, and lastly, the allowable deductions when calculating the taxable income of a
salaried taxpayer. The calculations in the examples are based on the taxable incomes of salaried
persons who also earn investment income (interest and dividends).
The calculation highlighted in this chapter, is the calculation that SARS performs by using
the information that it gets from the income tax return. It is important to know what the
Income Tax Act stipulates and how to calculate taxable income in order to check whether
SARS has done the calculation of taxable income correctly.
This chapter does not cover the definition of ‘gross income’ in detail, nor are the requirements con-
cerning the general deductions formula (refer to chapters 4 and 5 for these topics).
Chapter 3: Calculating Taxable Income 61

J Income protection contributions J Donations to approved bodies
J Pension and provident fund contributions J Taxable income
J Retirement annuity fund contributions
3.2 Gross income

Gross income is the starting point of any taxable income calculation. The Act defines gross income
and in chapter 4 it will be discussed in more detail. Gross income for an individual earning a salary
will be indicated on the IRP5/IT3(a) provided by an employer or contractor. This will include, for
example, cash salary, bonus, fringe benefits (see chapter 6) and leave pay.
There are other types of income that also form part of gross income (as per the Act), including rental
income, local interest, local dividends, foreign interest and foreign dividends.
Rental income is the money that one receives when a property is owned and rented out to a person
at a monthly cost.
Interest is the return that a person receives on investing money in an account with a bank. There are
many types of accounts on which a person can earn interest; including savings accounts, tax-free
investment accounts, fixed deposits, credit cards with a positive balance, cheque accounts with a
positive balance, and call accounts.
A person who earns interest will receive an IT3(b) tax certificate each year, from the bank. The IT3(b)
will indicate the interest that the person earned for the relevant tax year. Interest can also be earned
from other investment schemes, and the investment companies concerned will also issue an IT3(b).
An IT3(c) tax certificate will be issued where income is earned from the proceeds from the sale of unit
trusts and other financial instruments. Interest earned on a tax-free investment will be disclosed on an
IT3(s) issued by the tax-free investment service provider.
Dividends are the returns that a person receives when he or she owns shares in a company. Some
people buy shares in a company in order to resell them at a profit. These people are known as share
dealers, and the money from the sale of the shares will be included in their gross income (refer to
chapter 4). The interest, at this point, is not in share dealers, but rather in investors. These people
keep shares over a longer period so as to gain from the increase in the share’s value, and also to
earn dividend income from these shares. Companies can declare dividends whenever they wish, and
when they do so, they send their shareholders (people and companies who own their shares) proof of
the dividends that are due to them.
It is not possible for South African residents to invest directly offshore; therefore, they make use of a
broker to invest on their behalf. At the end of the tax year, the broker will also supply the taxpayer
with an IT3-01, indicating the foreign interest and foreign dividends received during the year of
assessment. The foreign interest and foreign dividends are included under foreign income (in rand)
on the ITR12 (the income tax return).
3.3 Exempt income

Some income that has to be included in gross income is allowed to be excluded from the calculation
of taxable Income. This is called exempt income. Section 10(1) of the Income Tax Act allows
(amongst others) that the following income (which is already included in gross income) is exempt
from normal tax for South African residents and therefore can be excluded from the calculation of
taxable income:
• Unemployment insurance pay-outs received. Any benefit or allowance, payable in terms of the
Unemployment Insurance Act 63 of 2001, is exempt income. In other words, if a person is unem-
ployed and receives an allowance from the Unemployment Insurance Fund (UIF), that allowance
will be exempt from income tax.
• All dividends from South African companies received by or accrued to taxpayers.
• Certain dividends from foreign companies received by or accrued to taxpayers.
• Interest received from normal investments, up to a certain limit. Where the taxpayer is 65 years or
older on the last day of the year of assessment, R34 500 is exempt, where the taxpayer is young-
er than 65 years old on the last day of the year of assessment, then R23 800 is exempt.
• Interest received from tax-free investment accounts (TFIA) – see chapter 4.
Dividends are included in gross income (refer to chapter 4), but local dividends are then
excluded as exempt income, because they have already been taxed under the separate
dividends tax system.
This is just a brief overview of exempt income so that the examples provided can include investment
income. Exempt income will be discussed in more detail in chapter 4 and that discussion will include
other types of income that are exempt from taxable income.
3.4 Deductions for salaried taxpayers

As the government wants to encourage people to save money towards their retirement, and ensure
that necessary services are available to all South Africans, the Income Tax Act allows for the specific
deductions of some of the expenses of the taxpayer, such as contributions to protect a person’s
income, retirement fund contributions and donations to approved public benefit organisations.
These expenses cannot always be deducted in full as there are certain requirements that need to be
met and specific limits that are applied before the deduction will be permitted.
The order in which the deductions are allowable is very important; so make sure that this
specific order is applied!
The deductions will be discussed according to the order of deduction. Before doing this, the discus-
sion up to this point is summarised.
In this chapter, the discussion’s focus is on the calculation of taxable income.
Taxable income is calculated as follows:
Gross income
Less: Exempt income

• SA dividends – all exempt, including dividends received from TFIA
• Foreign dividends – full or partial exemption
• Foreign interest – no exemption
• SA interest (not from TFIA) – up to R23 800 or R34 500 exempt
• SA interest from TFIA – all exempt
• UIF exempt
Equals: Income
Less: Deductions (in order)

• Retirement fund contributions
• Donations to approved bodies
Figure 3.1: The process for calculating taxable income

3.4.1 Income protection contributions

Premiums paid in terms of an insurance policy that covers the taxpayer against the loss of income
resulting from illness, injury, disability, unemployment or death are not tax deductible. These are also
known as ‘income-protector’ policies. However, a full exemption is granted for amounts received in
respect of such policies. This means that income protection contributions are not be deductible, but
any insurance pay-outs received will then also not be taxable.
Income protection policies must not be confused with normal insurance policies, for
example car and household insurance. The premiums for these insurance policies have
never been tax deductible, unless they were incurred in the carrying on of a trade and in
the production of income (i.e. if they meet the section 11(a) general deduction require-
ments discussed in chapter 5).
3.4.2 Retirement fund contributions

National Treasury has made significant policy changes to bring about retirement reform in South
Africa. The purpose of these amendments is to encourage individuals to make provision for their
retirement. A person can do so by joining a retirement fund, where contributions are made every
month and once the person no longer works, they will earn income from the fund. Retirement funds
can be pension funds, provident fund and retirement annuity funds. The differences between each of
these funds will be discussed briefly later in this section.
Contributions to any retirement fund are treated the same. Thus, at the end of the year, the individual
has to add together the contributions he/she made to a pension, provident and/or retirement annuity
fund. The calculation of the deductible amount is based on the individual's remuneration as well as
the amount of taxable income up to that point.
Contributions to a pension or provident fund are a kind of forced saving towards retirement. The idea
behind contributing to a pension or provident fund is that the fund manager will invest the money on
the contributors’ behalf, so that it can ‘grow’. Then, one day, when these contributors retire and stop
working, they will receive the money they put away during their working years, together with the
growth on it. Once the contributor retires, he or she will no longer receive a salary, but if contributions
were made to a pension fund, he or she will receive a monthly annuity payment, or if contributions
were made to a provident fund, he or she will receive a lump sum to cover his or her living expenses
and/or for possible re-investment.
In practice, pension and provident funds are linked to an individual’s employment and the employer
will assist by also contributing to the fund along with the employee. On retirement, the employee will
receive a once-off lump-sum amount (pension and provident funds), and a monthly pension annuity
payment based on how much he or she has contributed over his or her working years.
A retirement annuity fund differs from a pension fund in that a person can approach a fund and
contribute, and it is not linked to employment. Only the individual contributes to the retirement annuity
fund; no contributions are made by the employer. In fact, an employer will probably not even know
that an employee belongs to a retirement annuity fund unless the employee informs the employer.
Individuals contribute to a retirement annuity fund to supplement (add to) their retirement earnings, or
to make provision for their own retirement savings when they do not belong to a pension or a provi-
dent fund.
At the end of the tax year, the IRP5/IT3(a) will indicate the amount that the taxpayer contributed to
either a pension fund or a provident fund during the year of assessment. If the taxpayer has contrib-
uted to a retirement annuity fund, the fund will issue him/her with a tax certificate indicating the total
contributions made during the tax year.
Retirement fund contributions are allowed as a tax deduction. This means that the taxpayer’s contri-
butions to any retirement fund will reduce taxable income, and therefore reduce the amount of tax
payable to SARS. But there is a limit (maximum deduction) on the amount that is allowed to be de-
ducted! If the contributions are more than the limit, SARS will carry the excess over to the following
year of assessment. This excess then gets added to the following year’s actual contributions, again
limited to that year’s maximum deduction.
The limit for retirement fund contributions is the lesser of:

• R350 000; or
• 27,5% of the higher of:
i remuneration (in other words, employment income); or
i taxable income up to this point
• taxable income (before this deduction excluding capital gains).
The following flowchart can be followed in order to calculate how much of the contributions are
deductible for tax purposes:
Identify taxable income before this

Calculate remuneration*
deduction (the last total)
Choose the higher one
× 27,5%
R350 000 Taxable

Answer
(from the Act) income
Choose the smaller one
Add the contributions to all retirement funds together.

Remember
• to check if there was an amount from the previous Answer from above
year; = LIMIT
• to include any contributions made by an employer.
= TOTAL CONTRIBUTIONS
If the TOTAL CONTRIBUTIONS are less than the LIMIT, they can
be deducted in full
If the TOTAL CONTRIBUTIONS are more than the LIMIT, only the
limited contributions can be deducted. The excess (any amount
not deducted) is carried over to the next year of assessment.
Figure 3.2: The process for calculating retirement fund contribution deduction
* Remuneration is defined in the Fourth Schedule of the Income Tax Act and is dealt with in chapter 8. Basical-
ly, it includes any income received from the employer, for example salary, fringe benefits, allowances, over-
time and leave pay. It is therefore necessary to first calculate the amount of remuneration before one can
calculate the retirement fund deduction. For the purposes of this chapter, the amount of remuneration is pro-
vided in the examples.
• Because the employer’s contribution is a fringe benefit, it must be added to the indi-
vidual’s own contribution to get to the total amount contributed.
• The employer’s retirement contribution therefore has two tax consequences for the
employee: firstly, it results in a fringe benefit, which is included in the individual's
gross income. Secondly, it is added to the employee’s own contribution when calcu-
lating the deduction.
In some instances, a pension or retirement annuity fund may allow an employee to buy back pension
for years that he or she did not belong to the pension fund. This is often referred to as ‘arrear’ contri-
butions. The arrears contributions are simply added to the current contributions. This total is subject
to the limits indicated above.
• A deduction can never be more than the amount that the taxpayer actually contrib-
uted to the retirement fund for the current tax year.
• An excess is carried over to the next year of assessment.
EXAMPLE 3.1
Required:
Calculate the amount that Samuel will be able to deduct regarding retirement fund contributions in respect of
the current year of assessment.
Information:
Samuel Thelane earns a salary of R350 000 and a non-pensionable bonus of R25 000. He contributes
R31 000 per annum to a pension fund.
His pension fund also allowed him to buy back past-period pension contributions of R2 000, which he did.
Samuel's remuneration amounts to R375 000, and his taxable income before the retirement fund deduction is
R340 000.
Solution
Total retirement fund contributions = R31 000 + R2 000 = R33 000
Deduction is the lesser of:
• R350 000; or
i Remuneration = R375 000
i Taxable income = R340 000
i Thus: 27,5% × R375 000 = R103 125
• R340 000.
The deduction is the lesser of R350 000 or R340 000 or R103 125, thus R103 125.
As the total retirement contribution of R33 000 is less than R103 125, it is therefore deductible in full in the
current tax year.
EXAMPLE 3.2
Required:
Calculate the amount that Zanele will be able to deduct regarding retirement fund contributions in respect of
Information:
Zanele (aged 42) resigned from her employment on 30 June 2017 in order to get married. Her salary had
been R5 000 per month up to 30 June 2017. Upon her resignation, she received accumulated leave pay of
R2 100 as well as a lump sum of R32 000 from her employer. As she had not belonged to a pension fund,
Zanele had contributed (and still does) R1 500 per month to a retirement annuity fund.
Zanele's remuneration was correctly calculated as R54 100 and the taxable income before the retirement
fund deduction also as R54 100.
(continued)
Solution
Total retirement fund contributions = R1 500 × 12 = R18 000
• R350 000; or
i Thus: 27,5% × R54 100 = R14 878
• R54 100.
The deduction is the lesser of R350 000 or R14 878 or R54 100, thus R14 878.
Therefore, only R14 878 of Zanele’s contributions (R18 000) will be deducted for income tax purposes. The
excess contribution of R3 122 (R18 000 – R14 878) will be carried over to the 2019 year of assessment and
added to that year’s actual contributions.
EXAMPLE 3.3
Required:
Calculate the amount that Harrison will be able to deduct in respect of retirement fund contributions for the
current year of assessment.
Information:
Harrison Forrest is 43 years old, earns a salary of R150 000 per annum and a non-pensionable bonus of
R15 000 per annum. He contributes R12 000 per annum to a pension fund and R2 000 per annum to a retire-
ment annuity fund. Harrison’s remuneration was correctly calculated as R165 000 for the current year of as-
sessment. He also received the following investment income for the current year of assessment:
R
Interest received – South African bank (not a tax-free investment account) 10 000
Dividends received from South African companies 4 250
Solution
R
Gross income
Salary 150 000
Bonus 15 000
Dividends received from South African companies 4 250
Interest received – South African bank 10 000
179 250
Less: Exempt income
SA dividends – fully exempt (4 250)
Interest exemption up to R23 800 as not a TFIA; but limited to SA interest included in gross income (10 000)
Income 165 000
Less: Deductions
Total retirement fund contributions = R12 000 + R2 000 = R14 000
• R350 000; or
i Taxable income = R165 000 (per subtotal above)
i Thus: 27,5% × R165 000 = R45 375
• R165 000.
The deduction is the lesser of R350 000 or R45 375 or R165 000, thus a maximum of R45 375. (14 000)
Therefore the contributions are deductible in full as they are less than the limit.
TAXABLE INCOME 151 000
As from 1 October 2007, when a person retires or dies and receives a lump sum from a
retirement fund (pension fund, provident fund or retirement annuity fund), this lump sum
will be taxed in terms of tax rates that differ from those used for calculating normal tax.
From 1 March 2009, should a taxpayer withdraw from a retirement fund (before retirement
date), the lump sum received at such a date will also be taxed, but in terms of different
tax rates to those used to calculate normal tax and those used to calculate tax on lump
sums received on retirement. When receiving a retirement or withdrawal lump sum, the
fund paying the lump sum will have to provide the taxpayer with an IRP5/IT3(a) certificate
in respect of the lump sum. The IRP5/IT3(a) will show the gross amount of the lump sum,
and it will also show the taxable portion of the lump sum after all exemptions and deduc-
tions have been taken into account.
3.4.3 Donations to public benefit organisations

In order to encourage charitable contributions, donations are allowed as a deduction for income tax
purposes if the donation was in cash or an asset was given to an approved body (such as a public
benefit organisation). Organisations are classified as public benefit organisations (PBOs) on the
basis of certain public benefit activities, for example, activities concerned with welfare and humani-
tarian issues, health care, education and development, conservation, the environment, animal wel-
fare, and land and housing. All schools and universities (as defined in the South African Schools Act
and the Higher Education Act) are considered to be PBOs.
The donation deduction is the last deduction in the calculation of taxable income. Individuals can
claim a deduction for donations of up to 10% of taxable income before this deduction, if the individ-
ual has an official receipt (also known as a section 18A receipt) from the recipient of the donation (the
PBO). Any excess amount (i.e. the amount exceeding 10% of taxable income) can be carried over
and claimed as a deduction in the following year, again subject to the 10% limit.
If the taxpayer has no taxable income (or has an assessed loss), no deduction can be claimed. The
amount of the donation will then be carried over to the next year of assessment.
If the taxpayer receives a retirement fund lump-sum benefit after 1 October 2007 or a
retirement fund lump-sum withdrawal benefit after 1 March 2009, the taxable portion of
this benefit must first be excluded from taxable income before the 10% limit is calculated.
EXAMPLE 3.4
Required:
Calculate the amount that Wally will be able to deduct for donations made during the 2018 year of assess-
ment.
Information:
Wally Giveaway had taxable income of R145 000 (no retirement fund lump-sum benefits, withdrawal benefits
or severance benefits were included) before the following donations for the current year of assessment:
R
Donations to non-public benefit organisations 1 000
Donation to approved PBOs 2 500
Donation to ASINU University – an approved PBO 6 000
Wally received all the official receipts where applicable.
(continued)
Solution
R R
Taxable income before donations 145 000
Donations:
Non-public benefit organisations (not allowable) –
PBOs (allowable) 2 500
ASINU University (allowable) 6 000
Total donations for income tax purposes 8 500
Limited to 10% × R145 000 = R14 500. This means that Wally may not deduct
more than R14 500, but as his donations are less than the limit, he may deduct
the amount in full.
Note: there is no excess to carry forward to the 2019 year of assessment. (8 500)
EXAMPLE 3.5
Required:
Calculate the amount that Wally will be able to deduct for donations made during the 2018 year of assess-
ment.
Information:
Wally Giveaway had a taxable income of R145 000 (a retirement fund lump-sum benefit of R50 000 was in-
cluded in this amount) before the following donations for the current year of assessment:
R
Donations to non-public benefit organisations 1 000
Donation to PBOs 4 500
Donation to ASINU University – an approved PBO 6 000
Wally received all the official receipts where applicable.
Solution
R R
Taxable income before donations 145 000
Donations:
Non–public benefit organisations (not allowable) –
PBOs (allowable) 4 500
ASINU University (allowable) 6 000
Total donations for income tax purposes 10 500
Limited to 10% × (R145 000 – R50 000) = R9 500. Wally may not deduct more
than R9 500. Note: the excess of R1 000 (R10 500 less R9 500) is carried over to
the 2019 year of assessment to be claimed as a deduction. (9 500)
3.5 Summary
The following is a summary of this chapter:
Gross income
Less: Exempt income

• SA dividends – all exempt, including dividends received from TFIA
• Foreign dividends – full or partial exemption
• Foreign interest – no exemption
• SA interest (not from TFIA) – up to R23 800 or R34 500 exempt
• SA interest from TFIA – all exempt
• UIF exempt
Equals: Income

Limited to the lesser of:
i R350 000; or
i 27,5% × the higher of remuneration or taxable income before this
deduction.
• Donations to approved bodies – limited to 10% of taxable income
Figure 3.3: The process for calculating taxable income

QUESTION 1
Required:
Calculate Tweedy’s net normal tax payable/refundable for the 2018 year of assessment.
Information:
Tweedy Green, 52 years old, is married out of community of property to Piggy and they have two children who
are still at school. Neither Tweedy nor his spouse or children are disabled as defined. The medical fund covers
the whole family.
Tweedy’s remuneration was correctly calculated as R324 000 for the current year of assessment. The following
information relates to Tweedy for the 2018 year of assessment:
R
Salary 300 000
Bonus (non-pensionable) 24 000
Foreign interest 8 850
Foreign dividends (no specific foreign dividend exemption available) 1 420
Local interest – SA bank (not a qualifying TFIA) 26 000
Local dividends 4 000
Medical fund contributions made by Tweedy 30 000
Current pension fund contributions 25 500
Past pension fund contributions 2 000
Current retirement annuity fund contributions 3 600
Donation to the University of Bambridge (approved PBO) 7 500
Qualifying medical expenses not covered by the medical fund 3 350
Answers
QUESTION 2
Required:
Calculate Gweedy’s net normal tax for the 2018 year of assessment.
Information:
Gweedy Treen, 66 years old, is married out of community of property to Porky. Gweedy’s remuneration was
correctly calculated as R324 000 for the current year of assessment.
The following information relates to Gweedy for the 2018 year of assessment:
R
Salary 300 000
Bonus (non-pensionable) 24 000
Foreign dividends (from a listed company and thus fully exempt) 710
Medical fund contributions made by Gweedy (in respect of himself and Porky) 30 000
Current pension fund contributions 25 500
Past pension fund contributions 2 000
Donation to the University of Bambridge (approved PBO) 35 000
Medical expenses not covered by the medical fund 3 350
Answers
QUESTION 3
Required:
Calculate Andy’s net normal tax for the 2018 year of assessment.
Information:
Andy Handy, 29 years old, is unmarried and is a sales executive. Andy’s remuneration was correctly calcu-
lated as R215 000 for the current year of assessment.
The following information relates to Andy for the 2018 year of assessment:
R
Salary 120 000
Commission from sales (non-pensionable) 95 000
Provident fund contributions 28 400
Qualifying medical expenses (not a member of a medical aid) 25 000
Excess of a donation to the SPCA (approved PBO) made in 2017, carried over to 2018 800
Donation to Hospice (approved PBO) made in 2018 1 400
Answers
CHAPTER
4 Gross Income, Specific Inclusions

and Exempt Income
Author: E Hamel
Contents
Page
4.1 Introduction ........................................................................................................................... 74
4.2 The term ‘gross income’ ........................................................................................................ 75
4.2.1 Definition of ‘gross income’....................................................................................... 75
4.2.2 Definition of ‘resident’ ............................................................................................... 75
4.2.3 Year or period of assessment ................................................................................... 80
4.2.4 Total amount in cash or otherwise ............................................................................ 80
4.2.5 Received by or accrued to ....................................................................................... 81
4.2.6 Excluding receipts or accruals of a capital nature ................................................... 82
4.3 Specific inclusions in ‘gross income’ .................................................................................... 87
4.4 Exempt income ..................................................................................................................... 89
4.5 Summary ............................................................................................................................... 94
73

9 understand and apply the definition of ‘gross income’.
9 understand and apply the definition of ‘resident’.
9 identify and apply the specific inclusions in ‘gross income’.
9 identify and apply income that is exempt from normal tax.
4.1 Introduction
Chapter 2 identified that ‘gross income’ is the starting point in the tax framework, but it did not deal
with what constitutes ‘gross income’. Now that it is clear how the Income Tax Act 58 of 1962 (as
amended) (the Income Tax Act) is applicable to salaried persons, this chapter will look at the more
structured and prescriptive provisions of the Income Tax Act, and examine why certain amounts must
be included in ‘gross income’.
This chapter will look at what constitutes ‘gross income’ and identify which income is exempt from
normal tax.

J Gross income J Exempt income
J Resident J Specific inclusions
J Capital J Physical presence test
J Ordinarily resident
R
• General definition
• Specific Inclusions
Less: Deductions section 11 – but see below; subject to section 23(m) and (xxx)
assessed loss (section 20)
Less: Retirement fund deduction (section 11F) (xxx)

Chapter 4: Gross Income, Specific Inclusions and Exempt Income 75
4.2 The term ‘gross income’

As stated above, an amount must qualify as ‘gross income’ to be taxable. Section 1 of the Income
Tax Act defines ‘gross income’ as the name given to all income that is subject to taxation in terms of
the Act. The definition of ‘gross income’ consists of two parts.
Part one relates to the general definition. An amount needs to meet the requirements of the general
definition in order for it to be included (refer to paragraphs 4.2.1 to 4.2.6).
Part two of the definition is what the Act refers to as specific inclusions: a list of types of income that
must be included in ‘gross income’, even if they do not satisfy the requirements of the general part of
the definition.
The following paragraph contains a discussion of the general part of ‘gross income’ as contained in
section 1 of the Income Tax Act.
4.2.1 Definition of ‘gross income’

Section 1 of the Act defines ‘gross income’ as follows:
‘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 . . .
It is clear that the Act divides the above definition into two parts – one that is applicable to
residents of South Africa and one that is applicable to persons who are not residents (i.e.
non-residents). The importance of knowing the meaning of a number of terms used in the
definition, before applying the definition, is also clear.
In order to apply this long definition, it is important to break it down into its separate requirements,
and to understand the meaning of each requirement. Looking a bit closer at the two distinct parts of
the definition, it should be evident that the Act taxes residents on receipts and accruals no matter
where in the world these amounts originated from, whereas the Act taxes non-residents only on
income from a source in the Republic.
Before even starting with the other requirements of the definition, one needs to examine who is con-
sidered a ‘resident’ in terms of the Act and who is not, as this has an impact on how the other
requirements are applied.
4.2.2 Definition of ‘resident’

Section 1 of the Income Tax Act also defines the term ‘resident’. The definition of ‘resident’ refers to
both natural persons and persons other than natural persons. This chapter is only concerned with
natural persons, so it will only look at that part of the definition. For a natural person, ‘resident’ means
any:
(a) natural person who is –
(i) ordinarily resident in the Republic; or
(ii) not at any time during the relevant year of assessment ordinarily resident in the Republic, if that
person was physically present in the Republic –
(aa) for a period or periods exceeding 91 days in aggregate during the relevant year of as-
sessment, as well as for a period or periods exceeding 91 days in aggregate during each
of the five years of assessment preceding such year of assessment; and
(bb) for a period or periods exceeding 915 days in aggregate during those five preceding
years of assessment.
When looking at section 1 of the Income Tax Act, it becomes clear that it contains defini-
tions of terms used generally in the Income Tax Act. One can find these definitions in
alphabetical order in section 1 of the Income Tax Act.
It is clear from the definition of a ‘resident’ that a natural person can be regarded as a ‘resident’ if that
person meets either
1. the ordinarily resident conditions; OR
2. the requirements of the physical presence test.
J Ordinarily resident
The Income Tax Act does not define this term. Therefore, it received its meaning through deci-
sions made by the courts. A summary of these decisions created a generally accepted meaning
of the term ‘ordinarily resident’. The question of whether a person is resident in a country is one of
fact. The more important principles of ‘ordinarily resident’, as highlighted in court decisions, are
the following:
If a person, as part of his or her ordinary regular course of life, lives in a particular place
with some degree of permanence, that person will be regarded as being ordinarily resi-
dent in that place – Levene v IRC (1928 AC).
A natural person can have more than one place of residence for income tax purposes –
Reid v IRC (1926 SC).
A person’s ordinary residence is the country to which that person would naturally and as
a matter of course return from his wanderings – Cohen v CIR (1946 AD).
A person is ordinarily resident where he or she normally resides, apart from temporary or
occasional absences – CIR v Kuttel (1992 A).
J Physical presence test

The Act may still regard a person who is not ordinarily resident in South Africa as a ‘resident’ for
taxation purposes where the person is present in South Africa for a stipulated period. The Act
refers to this as the physical presence test. Where the Income Tax Act applies the physical pres-
ence test to an individual, it stipulates that the individual must be physically present in South
Africa during a six-year period.
Do not confuse the terms ‘domicile’ or ‘nationality’ with the term ‘resident’ for income tax
purposes, as these are completely different concepts. For example, for income tax pur-
poses, an individual can be a South African national with a South African identity docu-
ment, but this individual must still meet the definition of a ‘resident’ as defined in section 1
before SARS will consider him or her a ‘resident’ for income tax purposes.
In the following paragraphs, this chapter will look at the requirements of the physical presence test
and examine its application. It is important to note that each requirement builds onto the other, and
that one need not continue with the test if a person does not meet a specific requirement at a certain
stage.
Requirement 1: More than 91 days in the current year of assessment
Firstly, the person must have been physically present in South Africa for a total period or periods
exceeding 91 days during the current year of assessment (consider a part of a day as a full day for
the purposes of this test). This means that one will have to add up the number of days that the person
was in South Africa during the 2018 year of assessment.
‘Exceeding 91 days’, means that for the person to meet the requirement, he or she must be in South
Africa for 92 days or more. If this total is 92 days or more, the person has complied with the first
requirement of the physical presence test.
Where the total is 91 days or less, one does not need to continue with the test; SARS will not consider
the person a resident for the current year of assessment, and will only tax this person on his or her
income from a South African source.
Requirement 2: More than 91 days in each of the previous five years of assessment
Secondly, one must examine each of the previous five years prior to the current year of assessment.
This means looking at the 2017, 2016, 2015, 2014 and 2013 years of assessment, and adding up the
number of days that the person was in South Africa during each of these years.
During each one of these years, the person must have been in South Africa for a total period or
periods exceeding 91 days. Therefore, where the total is 91 days or less in any one of these years,
one does not need to continue with the test, as SARS will not consider the person a ‘resident’ during
the 2018 year of assessment.
Where the total number of days for each of these previous five years of assessment is in excess of 91
(i.e. 92 days or more), the person needs to comply with the third requirement of the test in order to be
considered a resident for income tax purposes.
Requirement 3: More than 915 days in the previous five years of assessment
The third requirement is that the person must have been physically present in South Africa for more
than 915 days during the previous five years of assessment.
A person becomes a resident of South Africa, in terms of these rules, in the year in which
all the requirements of the test are met. This person will then be taxed in South Africa on
income earned anywhere in the world for the full year of assessment in which the person
becomes a resident.
If a person who is ‘resident’ in terms of the physical presence test leaves South Africa for
a continuous period of 330 full days, SARS will no longer consider him or her a resident
for income tax purposes. This will apply from the first day of the 330-day period. The
person is thus a non-resident from the day that he or she leaves South Africa.
A day includes part of a day, but does not include any day on which a person is in transit
between two places outside of South Africa.
Remember, the physical presence test only applies to persons who are not ordinarily
resident in South Africa; therefore, it does not mean that a person would no longer be a
resident for income tax purposes if this person is ordinarily resident in South Africa and
out of the country for more than 330 continuous days. A person can be ordinarily resident
in a country from which he was physical absent for a big part of the year due to the mean-
ing attached to the term ‘ordinarily resident’ (see discussion).
Diagrammatically, one can illustrate the physical presence test as follows:
Current year Previous 5 years of assessment (2013 to 2017)
>91 days >91 days >91 days >91 days >91 days >91 days
2018 2017 2016 2015 2014 2013
AND
Previous 5 years of assessment (2013 to 2017)
>915 days in total over the 5 years (2013 to 2017)

It is up to taxpayers to prove the number of days that they were present in South Africa (section 102
of the Tax Administration Act lays this onus of proof on the taxpayer). This means that taxpayers will
have to keep accurate records of their entries into, and exits from South Africa, in the form of pass-
port stamps.
Let’s look at a few examples to see if you have understood these principles.
EXAMPLE 4.1
Required:
Indicate, in each of the following cases, whether SARS will consider Roy to be a ‘resident’ of South Africa in
terms of the physical presence test. Also state in which year, if applicable, he will become a resident.
Information:
Part A:
Year of assessment Present in South Africa
2018: 90 days
2017: 95 days
2016: 184 days
2015: 50 days
2014: 182 days
2013: 221 days
Part B:
2018: 93 days
2017: 95 days
2016: 184 days
2015: 50 days
2014: 182 days
2013: 221 days
Part C:
2018: 93 days
2017: 95 days
2016: 184 days
2015: 150 days
2014: 282 days
2013: 221 days
Solution
Part A
Requirement 1:
Roy was not in South Africa for more than 91 days in the current year of assessment.
Where the total is 91 or fewer days, one does not need to continue with the test, as the person will not be
considered a resident for income tax purposes, for the current year of assessment. Roy is not a resident of
South Africa for income tax purposes.
(continued)
Part B
Requirement 1:
Roy was in South Africa for more than 91 days in the current year of assessment.
If this total is 92 or more days, the person has complied with requirement 1 of the test. This means that one
needs to proceed to requirement 2.
Requirement 2:
Roy was in South Africa for 95 days in the 2017 year of assessment, 184 days in the 2016 year of assess-
ment, but in the 2015 year of assessment, he was in South Africa for only 50 days.
Where the total is 91 days or less in any one of these years, one does not need to continue with the test, as
Roy will not be considered a resident for income tax purposes during the 2018 year of assessment.
Part C
Requirement 1:
Roy was in South Africa for more than 91 days in the current year of assessment.
If this total is 92 or more days, the person has complied with requirement 1 of the test. This means that one
needs to proceed to requirement 2.
Requirement 2:
Roy was in South Africa for 95 days in the 2017 year of assessment, 184 days in the 2016 year of assess-
ment, 150 days in the 2015 year of assessment, 282 days in the 2014 year of assessment and 221 days in the
2013 year of assessment.
Where the total for each of these previous five years of assessment is in excess of 91 (i.e. 92 days or more),
the person needs to comply with a third requirement of the test in order to be considered a resident for
income tax purposes.
Requirement 3:
Roy was in South Africa for 932 days (95 + 194 + 150 + 282 + 221) during the previous five years of assess-
ment, which is more than the required 915 days.
According to the physical presence test, Roy will be considered a resident for income tax purposes, for the
full 2018 year of assessment (from 1 March 2017).
After determining whether a person is ‘resident’ or not for income tax purposes, it will become clear
which part of the ‘gross income’ definition one should apply. If the person is a ‘resident’ either in
terms of ordinary residence or because of physical presence in the country, the Act will subject him
or her to tax in South Africa on any income earned anywhere in the world (that is, his or her worldwide
income). Where the person is not a ‘resident’, the Act will only subject him or her to tax in South Africa
on income from a South African source.
South Africa has entered into a number of double taxation agreements with most coun-
tries that are major trading partners. A double taxation agreement means that the gov-
ernments of two countries entered into an agreement that stipulates which country gets to
tax certain income that both of those countries might want to tax. A double taxation
agreement will override the source rules applicable to non-residents. This means that if
South Africa wishes to tax an amount that a non-resident earned in South Africa, one
would first have to ascertain whether there is a double taxation agreement between South
Africa and the country in which this non-resident is a resident. If an agreement exists, it
will determine how the income will be taxed – which might be different to what the South
African tax legislation stipulates.
It might happen that a resident has to pay tax in both South Africa and another country (e.g. if there is
no double taxation agreement, it could result in both countries having the right to tax the same
amount). In this case, the taxpayer will pay tax on the same amount in both countries. South Africa
makes provision for relief in respect of double taxation by allowing residents to deduct foreign taxes
paid as a deduction from South African tax payable. This is called a foreign tax rebate (sec-
tion 6quat), which allows taxpayers to deduct the foreign tax they paid from their South African tax
payable, but where the foreign tax paid is more than the South African tax payable on the same
income, SARS limits the foreign tax rebate to the South African tax payable but it may be carried
forward in certain circumstances and for a certain time period only (seven years).
It sometimes happens that foreign countries also tax South African sourced income. In this case, the
section 6quat(1) rebate is not available as this rebate is only available in respect of foreign taxes paid
on income derived from a foreign source. So to cater for this, section 6quat(1C) allows a deduction
(not a tax credit as is the case for section 6quat(1) for the foreign taxes paid on South African
sourced income.
Apart from the source component of the definition, which differs for non-residents, there are four
requirements of the general definition of ‘gross income’ that are the same for both residents and non-
residents. The meaning of these four requirements is important for income tax purposes.
One can try to identify the four requirements that are the same for both residents and non-residents
by revisiting the general definition of ‘gross income’.
Section 1 of the Act defines ‘gross income’ as follows:
‘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 . . .
Therefore, one can summarise the four requirements of the general definition of ‘gross income’ as
follows:
• in any year or period of assessment;
• the total amount, in cash or otherwise;
• received by, or accrued to, or in favour of;
• excluding receipts or accruals of a capital nature.
4.2.3 Year or period of assessment

Similar to accounting, the Income Tax Act calculates taxable income for a period of 12 months, which
the Act refers to as a ‘year of assessment’. In the case of a natural person, a year of assessment runs
from 1 March to 28/29 February. The use of this phrase in the definition of ‘gross income’ means that
the Act might exclude or include an amount in the ‘gross income’ of the current year of assessment
based on the date on which the individual earned the amount (income). This does not mean that the
excluded income will not be subject to taxation, it just means that it will be subject to taxation in
another year of assessment (a question of timing).
4.2.4 Total amount in cash or otherwise

The definition further requires that there must be an amount before anything can form part of ‘gross
income’.
In CIR v Butcher Bros (Pty) Ltd 13 SATC 21, it was held that one cannot include an asset
in income if it does not have a monetary value or cannot be turned into money.
The term ‘in cash’ is self-explanatory. This means that a person will include any money amount in
‘gross income’. The term ‘or otherwise’, expands the application of ‘gross income’ to include situ-
ations where assets, rather than money, changes hands.
Where a computer shop accepts a customer’s old computer as part of the selling price of
a new computer, then both the value of the old computer (market value) and the cash
received from the customer will be included in the ‘gross income’ of the computer shop.
The term ‘amount’ includes not only money, but also the value of every form of property
earned by the taxpayer – Lategan v CIR 2 SATC 16. In CIR v People’s Stores (Walvis Bay)
(Pty) Ltd 52 SATC 9, the court widened the term ‘property’ to include both corporeal
(tangible) and/or incorporeal property (intangible), as long as one can attach a monetary
value to it.
Where a taxpayer received an asset or any other property (other than money), one will
have to ascertain a value. The value will be the market value of the asset on the date that
it was received – Lace Proprietary Mines (Pty) Ltd v CIR 9 SATC 349.
The onus of establishing an amount, for the purposes of ‘gross income’, is the responsibil-
ity of the Commissioner and not the taxpayer. The onus reverts to the taxpayer when the
Commissioner has determined the amount – CIR v Butcher Bros (Pty) Ltd.
4.2.5 Received by or accrued to

Receipts
Taxpayers must include any amount that they actually received in their ‘gross income’. A taxpayer
must receive an amount on his or her own behalf or for his or her own benefit, before one can state
that the taxpayer received the amount. This means that the taxpayer must actually be ‘entitled to’ the
amount before including it in his or her ‘gross income’.
For example:
If a person owns a second property, which this owner rents out, and an estate agent collects the rent
on this owner’s behalf, the estate agent will not have received the rent for his or her own income tax
purposes, because the rent will not be for the estate agent’s benefit.
However, where taxpayers are involved in illegal activities, SARS will tax the money they received
from these activities as ‘gross income’ – irrespective of illegality.
In CIR v Delagoa Bay Cigarette Company 32 SATC 47, it was held that the legality or
otherwise of the business that produced the income was irrelevant to the question of the
liability of that income for tax purposes.
Accruals
The use of the phrase ‘or accrued to’ in the definition of ‘gross income’, means that amounts that the
taxpayer has not yet received, but which have accrued to the taxpayer, will nevertheless form part of
‘gross income’.
For example:
A taxpayer does not physically receive the interest earned on a savings account that the bank
credited to the account, but the interest accrues to the taxpayer; therefore, the interest will be
included in ‘gross income’.
The term ‘accrue’ has given rise to court cases to decide on the exact meaning and interpretation of
this term. Over and above the court cases that debated the meaning of ‘accrue’, the Income Tax Act
introduced a proviso to the definition of ‘gross income’.
The proviso sheds the following light on the meaning of the term ‘accrued to’:
• ‘Accrue’ means ‘become entitled to’ – this meaning was defined in Lategan v CIR 2 SATC 16 as
‘become entitled to’; and
• Taxpayers must include the full amount of any amount they ‘become entitled to’ during the year of
assessment in their ‘gross income’. Taxpayers may not include only the present value of the
amount they ‘become entitled to’, based on the argument that they will only receive the amount in
the future.
In Mooi v SIR 34 SATC 1, the court held that accrual only takes place if the taxpayer
becomes unconditionally entitled to an amount. This means that where an amount is
conditional on something happening, the amount does not actually accrue to the taxpayer
until the condition is satisfied.
EXAMPLE 4.2
Required:
During which year of assessment will the R15 200 be included in Clark’s gross income?
Information:
Clark Buscket sold computers after hours to earn extra income. On 25 February 2018, he sold a computer
and printer for R15 200. He had the computer and printer delivered on 28 February 2018. Clark only received
his R15 200 on 30 March 2018.
Solution
Clark has become unconditionally entitled to the amount of R15 200 as soon as ownership of the computer
changed – that is, on delivery. The printer was delivered on 28 February 2018 (condition met) even though
the amount was only received later (30 March 2018). The R15 200 will be included in Clark’s 2018 year of
assessment.
In most situations, the timing of receipt and accrual will be the same. Where the timing differs, the
taxpayer will have to include the amount in his or her ‘gross income’ on the earlier of the two dates.
This does not mean that SARS will tax the taxpayer on the amount when it accrues as well as when
the taxpayer receives it, as this would lead to double taxation.
Examples of situations where the timing of accrual and receipt would differ include:
Goods sold on credit: As soon as the delivery of the goods takes place, the seller becomes uncon-
ditionally entitled to the sales price even though he or she will only receive it on a later date. This
means that credit sales will form part of ‘gross income’ on the date of the sale when ownership
changes, and not on the date when the seller receives payment.
Rent received in advance: Where a tenant rents a property on a monthly basis, but pays the land-
lord three months’ rent in advance, the landlord must include all the rent in his or her ‘gross income’.
The landlord received the amounts, even though they have not yet accrued (i.e. the landlord is not
yet unconditionally entitled to the rent for the future months).
The timing difference between a receipt and an accrual is only important where it takes
place in different tax years. The event that takes place first will determine the year in
which the taxpayer will have to include the income in ‘gross income’.
What taxpayers intend to do with income after they have received it, or after it accrued to them, is
irrelevant; the amount will still be included in ‘gross income’ of the taxpayer who initially received the
amount. Only, if the right to future income is sold (right to income ceded), the income earned in future
will accrue to the ‘new’ recipient.
4.2.6 Excluding receipts or accruals of a capital nature

This is the last requirement, and one of the most difficult in the definition of ‘gross income’ to apply in
practice. The definition of ‘gross income’ specifically excludes amounts of a capital nature. This
means that where an amount is capital in nature, this amount will not be included in the ‘gross
income’ based on the general part. These amounts of a capital nature will instead be subject to tax in
terms of capital gains tax (refer to chapter 7). Generally, one would refer to this type (i.e. not of a
capital nature) of income as income that is revenue in nature.
The Income Tax Act does not define the term ‘capital nature’, because it cannot define it, given that
the nature of income differs from person to person. It is important to remember that an amount will
normally be either of a capital nature or a revenue nature; it is not normally possible for one amount to
be partly capital and partly revenue in nature.
Where the Act does not define terms, one will have to look at how the courts have treated and in-
terpreted them. The courts could also not set down a fixed interpretation with regard to the term
‘capital nature’; therefore, they decided to lay down certain tests that a person can use to identify the
nature of the income in question.
It is easy to determine whether some types of income are of a capital or a revenue nature (e.g. sal-
aries, interest, or rental income), but other forms of income will need to be examined. This is a grey
area of income tax, and the term ‘capital nature’ has led to many court cases.
The following paragraphs will look at a few of the important principles established by the courts.
These principles will give an indication of the application of the term ‘of a capital nature’. However,
one must bear in mind that the courts will deal with each case on its own merits.
Normally, there is a link between a receipt of a revenue nature and income from a business enter-
prise, or from using or letting capital.
CIR v Visser 8 SATC 271 compared capital to a tree and revenue to the fruit of the tree.
‘Gross income’ will include the fruit (revenue nature), but not the tree. The tree will be of a
capital nature.
An example of how this differs from person to person can be

found by considering a house. If a person buys a house to rent it
out, the house will be the tree and the rental received will be the
fruit. In this case, when the person sells the house, the proceeds
will be of a capital nature; therefore, these proceeds will not be
included in ‘gross income’. There could, however, be capital gains
tax consequences (see chapter 7).
In the case of a person who buys and sells houses to make a
profit, the houses will be the fruit (trading stock), and the proceeds
from the sale of the houses will be included in ‘gross income’.
Not all capital/revenue decisions are as clear-cut as the one above;
therefore, the courts have set guidelines to follow when trying to ascertain whether an amount
received by a person is of a capital or revenue nature.
There are two broad types of guidelines to apply, as determined by the courts.
• Subjective tests: these tests consider factors that point towards the intention of the taxpayer,
although the factors are often not measurable.
• Objective tests: these tests consider the facts and measure them against certain norms to
determine or test the intention of the taxpayer.
Some of the tests might give conflicting solutions to the nature of the income under examination. It is
important to realise that this is not an easy decision (in many instances), and that the facts must back
up what the taxpayer is saying (intention).
When SARS and the taxpayer agree on the nature of the income, it is because they agree with the
outcome of the subjective tests (i.e. the intention of the taxpayer). When SARS and the taxpayer do
not agree on the nature of the income, this implies that the courts will have to apply the objective
tests to the situation to see whether the facts match the intention of the taxpayer.
Intention (subjective test)

One of the main tests used by the court is that of the taxpayer’s intention. Whether a taxpayer has
entered into a scheme of profit-making will often depend on the taxpayer’s intention. If a taxpayer
purchased a house to hold as an investment, this will lead one to believe that when the taxpayer sells
the house, the income received will be of a capital nature. If a taxpayer purchased a house with the
intention of reselling it at a profit, the proceeds of the house, when the taxpayer sells it, will be of a
revenue nature. In both instances, a taxpayer sold a house, but it is the taxpayer’s intention that
ascertains the nature of the revenue received. Therefore, in deciding whether the intention of a tax-
payer is speculative (a profit-making scheme) as opposed to making an investment, it will be neces-
sary for the court to ascertain the taxpayer’s reason for acquiring the asset.
In SIR v Trust Bank of Africa Ltd 37 SATC 87, the court stated that the intention of the
taxpayer when he or she purchases the asset is very important and will often be the
deciding factor.
J Change of intention
The intention of the taxpayer when he or she purchases the asset is not always conclusive,
because the taxpayer might change his or her intention during the holding of the asset. The mere
sale of an asset does not necessarily indicate a change of intention.
In Natal Estates Ltd v Secretary for Inland Revenue 37 SATC 193, the court looked at the
intention of the taxpayer and whether there was a change of intention at a later stage.
The court ruled that if a person ‘had crossed the Rubicon’ (done something more) and
started a ‘scheme of profitmaking’ (treating capital assets like trading stock), the profits
would be of a revenue nature.
A person may realise his or her asset to the best advantage and a mere subdivision of
land does not constitute a trade. The intention at the time the asset is purchased is deci-
sive, unless there is a subsequent change in intention and the taxpayer ‘crossed the
Rubicon’ (CIR v Stott 3 SATC 253).
J Mixed intentions
A taxpayer can purchase an asset with mixed intentions. A taxpayer might buy a house with the
intention of renting it out until the property prices are high enough so that he or she can sell the
house for a good profit.
Where there are mixed intentions, one would have to look for the main or dominant inten-
tion (COT v Levy 18 SATC 127).
It is clear that it is not always easy to ascertain a person’s true intention. The court will have to look at
taxpayers’ evidence concerning their motives at the time of purchasing the asset, and consider what
the taxpayers’ indicate as their intention at the time of purchasing the asset. This means that the court
will have to measure all of these factors against the taxpayer’s credibility as a witness, as well as the
facts of the case. As stated earlier, it is very important that the facts match the subjective factors
(intention of taxpayer).
One must always remember that, in terms of section 102 of the Tax Administration Act, a person who
claims that an amount is either exempt from tax, or not subject to tax, will have to prove this claim.
Objective tests
Where SARS and the taxpayer differ regarding the nature of income, the court will have to apply the
objective tests to measure the taxpayer’s indicated intention at the time and thereafter. In reaching a
decision, the court will also consider the following facts as being indicative of the taxpayer’s intention,
although these are not conclusive:
J The manner of acquisition

This test determines the origin of the funds that the taxpayer used in purchasing the asset that
has now led to the receipt of income.
The ‘norm’ is that where taxpayers use their own funds to purchase assets, this is more indicative
of an investment intention than if they borrow funds over a short period.
Where a taxpayer inherits an asset, this will support a capital nature intention; however, it will not
rule out that the amount received might be of a revenue nature.
J The manner of disposal

This test looks at the way in which the taxpayer enters into the process of selling the asset. Where
the taxpayer is not planning to sell the asset and someone approaches the taxpayer ‘out of the
blue’ with a profitable offer, this will not change the asset from one that the taxpayer purchased
for investment to one that he or she purchased in a scheme of profit-making.
Where the taxpayer enters into an elaborate marketing and advertising process (crossing the
Rubicon) concerning an asset, this will often indicate that the taxpayer is involved in a profit-
making scheme.
J The period for which the asset was held

When a person held an asset for a long time, this will indicate that the person purchased the
asset with an investment (capital) motive; by contrast, where a person sells an asset after a very
short period, this will often indicate that the person purchased the asset with a profit motive.
J Continuity
The number of times that a person enters into a similar transaction will be indicative of whether
the taxpayer is involved in a profit-making scheme. However, the fact that a person enters into a
particular kind of transaction only once will not exclude the possibility that the person received
the income as part of a profit-making scheme.
In Stephen v CIR 1919 WLD 1, the taxpayer entered into a once-off salvage operation,
and the court viewed the income that the taxpayer received to be of a revenue nature
because of the taxpayer’s profit motive.
J Occupation of the taxpayer

Where there is a close link between the taxpayer’s occupation and the income in question, it is
more likely that he or she received the amount as part of his or her occupation. In fact, it would be
quite onerous for a taxpayer to prove otherwise. Take, for example, a man who buys and sells
cars for profit: when he sells his privately owned car, he will have to take care to prove that it is a
capital asset, and not one that he originally purchased to sell at a profit.
J Asset in question
When a taxpayer acquires an asset to produce income, it will be a capital asset, but if a taxpayer
purchases an asset that has no income flowing from it, to resell it at a profit, this asset is likely to
be a revenue asset.
Some assets, just by their nature, are either capital assets or revenue assets (e.g. trading stock,
by its nature, is a revenue asset).
EXAMPLE 4.3
Required:
Briefly discuss whether the proceeds from the sale of the flats are of a revenue or capital nature.
Information:
Herculus Tough has been letting a block of flats in Sunnyside for the past ten years. Herculus bought the flats
with savings from his full-time employment income.
He does not have a history of property dealing – he has been a full-time employee at a large manufacturing
company for the last 20 years. Due to the crime in the area, he struggles to let the flats to tenants. He is aware
that he can sell the flats individually and make a substantial profit.
Solution
All the following factors need to be taken into account in determining whether the proceeds from the sale of
the flats are of a revenue or capital nature:
(i) Subjective tests
J Intention
Herculus purchased the flats for investment purposes: he has been letting the flats for the past ten
years.
J Change of intention
Due to a change in circumstances, Herculus decided to sell the flats individually. SARS allows a
taxpayer to try to obtain the best price without undertaking a profit-making scheme. Herculus did
not enter into a scheme of profit-making, he merely disposed of the flats separately.
J Mixed intention
No mixed intentions are applicable in this situation.
(ii) Objective tests
J Manner of acquisition
Herculus purchased the flats as an investment, with his savings, which indicates that it was an
alternate form of investment and of a capital nature.
J Manner of disposal
He disposed of the flats to obtain the best possible price. He was not making any return on his
investment, as he struggled to get tenants for the flats and this is indicative of it being of a capital
nature.
J Period for which asset was held
Herculus held the asset for ten years, which indicates that he did not buy it to sell it right away at a
profit, and that it is of a capital nature.
J Continuity
Herculus does not have a history of property dealings. This indicates that the amount is of a capital
nature.
J Occupation of the taxpayer
Herculus is a full-time employee at a manufacturing business, not a property selling business; there-
fore he is not engaged in a profit-making scheme.
On the basis of the above, it is fair to state that in all probability the proceeds from the sale of the flats indicate
a sale of a capital nature; therefore, the proceeds should be excluded from ‘gross income’.
We have now discussed the general elements of the definition of ‘gross income’. However, remember
we said that there are two parts to the ‘gross income’ definition – part one is the general definition
and part two is the specific inclusions in the ‘gross income’ definition. We will now discuss these
specific inclusions in more detail.
4.3 Specific inclusions in ‘gross income’

Apart from the general definition of ‘gross income’, the section 1 definition also includes a list of what
the Act refers to as specific inclusions. In most cases, these amounts would not be included in ‘gross
income’ in terms of the general definition. The fact that the authorities included a specific list in the
Income Tax Act makes it clear that they intended for the following amounts to be subject to taxation,
no matter what the nature or the source of the income. The specific inclusions that follow the general
definition of ‘gross income’ are included in paragraphs (a) to (n) of section 1 of the Act, at the end of
the general definition.
The following is a summarised version of the specific inclusions that could affect a salaried taxpayer:
• annuities and living annuities;
• alimony, allowances or maintenance payments;
• amounts for services rendered;
• restraint of trade payments;
• lump-sum benefits/gratuities from employers;
• lump-sum benefits from retirement funds;
• lease premiums;
• know-how payments;
• leasehold improvements;
• fringe benefits;
• sale of assets similar to trading stock manufactured by taxpayers;
• dividends and foreign dividends;
• farming and economic development subsidies;
• key-man insurance policies;
• recoupments and other inclusions.
The paragraphs that follow contain a discussion of the specific inclusions applicable to individual
taxpayers.
J Annuities and living annuities

An annuity is not defined in the Income Tax Act, but the characteristics of an annuity are known
because of a court case, ITC 761 (1952).
• An annuity is a fixed annual payment (there is usually an option to divide it into smaller
amounts, e.g., monthly instalments).
• The payment is repetitive (annually, monthly, bi-monthly or weekly).
• There is an obligation for someone to pay the amount. This last characteristic means that a
voluntary payment cannot be an annuity.
Example: if you enter a lottery every now and again and you win the lottery and take a lump sum
prize, the amount will not be taxable as it is of a capital nature. However, if you allow the amount
to be invested on your behalf by the lottery and you receive monthly or annual payments, these
payments will constitute an annuity and you will be taxed on the amount.
Another example can be found when a person sells his or her business. If the person pays a
lump sum, it will be treated as a capital amount (as long as the seller is not in the business of
buying and selling businesses). However, if the purchase price is a fixed amount every month in-
stead of the once-off purchase price, the monthly payments will constitute an annuity and will be
taxable. Note that the payment of a capital liability (debt) in instalments is not an annuity.
Even though an annuity must be a fixed amount, this does not mean that the amount
cannot change.
Where a person purchases an annuity from an insurance company (called a purchased annuity),
part of the amount that the insurance company pays out each month or year in terms of the policy
will be exempt from tax (the capital portion) in terms of a formula contained in section 10A of the
Act.
J Alimony
Although the receipt of alimony is specifically included in ‘gross income’, alimony that a person
received in respect of a divorce after 21 March 1962 is exempt from tax in terms of section 10 of
the Act.
J Amounts for services rendered

All and any amounts received in respect of services rendered (including employment) are
included in ‘gross income’, no matter whether these amounts are capital or revenue in nature.
• It is important to note that even voluntary payments will be included in ‘gross income’
due to this specific inclusion.
• Note the use of the term ‘amount’; where there is no amount, there will be no inclusion
in ‘gross income’.
• Amounts received for services rendered will often be included in ‘gross income’ in
terms of the general part of the definition of ‘gross income’.
• The amount is taxable in the hands of the person rendering the service in the year of
receipt, irrespective of the period when the services were rendered.
J Restraint of trade payments

A restraint of trade payment is a payment made to a person who undertakes not to render a
certain service. A restraint of trade payment is of a capital nature, and as such, the Act excludes
it from the general part of ‘gross income’. It is also not for services rendered; therefore, it will not
fall under the previous specific inclusion. Therefore, as a specific inclusion, a restraint of trade
payment is included in ‘gross income’. This inclusion only applies to natural persons and only for
amounts related to past or future employment or the holding of an office (for example a director).
If the payment does not relate to employment, it will not be included in the taxpayer’s gross in-
come and will be of a capital nature.
J Gratuities from employers
Gratuities are payments made by an employer to an employee, and are usually for some sort of
loss of office. These payments are usually of a capital nature, and as such would not be included
in the general definition of ‘gross income’. These payments are also not in respect of services
rendered.
This specific inclusion, therefore, means that amounts received in respect of a variation or loss of
office (including where the taxpayer dies) will be included in ‘gross income’. The types of receipts
that would be included in ‘gross income’ because of this inclusion are the following:
• compensation paid for changes made to an employee’s entitlement to leave in a service
contract;
• an amount paid on resignation in respect of accumulated leave pay;
• compensation paid to a director for loss of directorship;
• an amount paid to an employee where there is a breach of service contract by the employer;
• any of the above paid to the dependants of a deceased employee.
J Pre-retirement and retirement lump-sum benefits

Any lump sum received from one of the funds of a South African or deemed South African source
will be included in ‘gross income’. One must note, however, that the Act allows certain deductions
against lump sums, after which it taxes the balance in terms of progressive rates using separate
lump sum tax tables.
J Lease premiums
Where a person receives a payment for the use of a property, one refers to it as rental. Income
received from using an asset is of a revenue nature and is therefore included in ‘gross income’.
Sometimes it might happen that a person does not pay for the use of an asset, but for the right to
use that asset. It might also happen that, instead of paying a monthly rental, a person might pay a
lump sum amount at the beginning of the lease; in this case, this specific inclusion will include the
lump sum (premium) received in ‘gross income’.
J Know-how payments
‘Gross income’ includes any amount received for imparting any scientific, technical, industrial or
commercial knowledge or information. The imparting of knowledge would include, amongst others:
• technical fees;
• operating manuals; and
• sale of information.
J Fringe benefits
Fringe benefits are benefits that employees receive from their employers, but it is usually difficult
to determine the value of this benefit. In terms of the general ‘gross income’ definition, where an
amount cannot be valued, it will not be included in ‘gross income’. Fringe benefits are included in
‘gross income’ under this specific inclusion, and the Seventh Schedule to the Income Tax Act
sets out how the benefits must be valued. (Refer to chapter 6 for some of these fringe benefits.)
Fringe benefits can only apply to employees as there must be an employer-employee

relationship for the Seventh Schedule to apply.
J Dividends
All the dividends that a person receives are included in ‘gross income’.
J Recoupments and other inclusions
Under this specific inclusion, ‘gross income’ includes all amounts that are to be included in a
taxpayer’s income in terms of other sections of the Act.
4.4 Exempt income

All amounts that meet the requirements of the ‘gross income’ definition are included in the taxpayer’s
gross income. However, the Income Tax Act provides that certain types of income are exempt from
income tax, i.e. not subject to tax. Let us revisit the framework to see where this fits into the bigger
picture:
R
Less: Deductions section 11 – except for s11F below; subject to section 23(m) and (xxx)

Sections 10 and 12T of the Income Tax Act provide for certain types of income to be exempt. The
focus of the following paragraphs will only be on income that is exempt for individuals, as this chap-
ter’s focus is only on individuals.
Income can only be exempt if it was included in ‘gross income’ in the first place. The
exempt portion can also not exceed the original amount included in ‘gross income’. Do
not confuse exempt income with a deduction (refer to chapter 5 for a discussion on
deductions).
J War pensions and awards for diseases

Section 10(1)(g) provides an exemption from normal tax for the following amounts received:
• war pensions;
• compensation for diseases contracted by individuals employed in mining operations;
• disability pensions;
• certain compensation paid in terms of the Workmen’s Compensation Act 30 of 1941 or the
Compensation for Occupational Injuries and Diseases Act 130 of 1993;
• pensions paid in respect of occupational injuries;
• pensions paid in respect of a disease contracted after 1 March 1994;
• compensation paid in respect of an employee’s death, where it was a result of his or her
employment; and
• compensation paid in terms of the Road Accident Fund Act 56 of 1996.
J Foreign pensions
Section 10(1)(gC) provides an exemption from normal tax for the following amounts received:
• pensions received from any other country in terms of its social security system;
• pensions received from a source outside South Africa relating to past employment outside
South Africa.
J Funeral benefits
Section 10(1)(gD) provides an exemption from normal tax for a funeral benefit paid in terms of the
Special Pensions Act 69 of 1996 to a previous member of a liberation movement’s armed wing.
J South African interest paid to non-residents
Section 10(1)(h) exempts interest received by or accrued to a non-resident, provided that the
non-resident:
• is not physically present in South Africa for more than 183 days in aggregate during the
twelve-month period preceding the date on which the interest is received; and
• the debt from which the interest arises is not effectively connected to a permanent establish-
ment of that non-resident.
A 15% withholding tax on interest may apply with effect from 1 March 2015. A person who pays the
interest has to withhold the 15% tax and pay over the remainder of the interest to the non-resident.
J South African interest paid to South African residents
Interest received is included in gross income, although section 10(1)(i) provides for a portion of
this investment income to be exempt from tax. This exemption does not apply to interest received
in respect of a tax-free investment as defined in section 12T.
If a taxpayer is under 65 years of age (on 28/29 February of the tax year), R23 800 of the interest
received, is exempt from tax, and if the taxpayer is 65 years of age or older, R34 500 of the interest
received, is exempt from tax. This exemption only applies to South African interest received. This
exemption may also apply to a non-resident if section 10(1)(h) is not applicable (see above).
The intended purpose of this interest exemption is to promote savings that will flow into the gen-
eral economy. The amount of the interest exemption used to change every year, but this exemp-
tion is no longer being adjusted annually in line with National Treasury’s policy to encourage the
use of tax-free investments as defined in section 12T and to phase out the annual interest exemp-
tion.
EXAMPLE 4.4
Required:
Calculate Mahindra’s taxable investment income for the 2018 year of assessment.
Information:
Mahindra, 45 years old and a South African resident, received the following investment income for the 2018
year of assessment:
R
Interest received – South African (from a bank)(not a tax-free investment) 30 000
Dividends received – South African companies 15 000
Solution
R
Gross income
Interest received – South African 30 000
45 000
Less: Exempt income
Dividends received – South African companies (note) (15 000)
Interest exemption (23 800)
Income 6 200
Note:
Dividends received from a South African company are subject to dividends tax (separate tax) and are
exempt from normal tax in terms of section 10(1)(k)
J Foreign dividends
Certain foreign dividends qualify for an exemption in terms of section 10B. In terms of this sec-
tion, foreign dividends will be exempt where the local investor holds at least 10% of the equity
shares and voting rights of the foreign company. An exemption will also apply where a foreign
company, listed on a stock exchange, pays the dividends.
Foreign dividends that do not qualify for the full foreign dividend exemptions (described above)
can qualify for the partial exemption. The partial exemption of foreign dividends for individuals is
calculated as 25/45 of the gross foreign dividend received.
Taxpayers can never deduct an exemption that is greater than the amount they received.
The total investment exemption can never exceed the annual amount allowed (which
depends on the age of the taxpayer).
Note: For a taxpayer who has passed away during the year, one will have to determine
the taxpayer’s age on 28/29 February, i.e. what the taxpayer’s age would have been if he
or she were still alive. If the taxpayer would have been 65 years old, he or she qualifies for
the full R34 500 exemption.
J Interest and dividends received from tax-free investments

Any interest and dividends received by a natural person from a tax-free investment is exempt in
terms of section 12T. Tax-free investments are defined in section 12T and are regulated by the
Minister of Finance. Tax-free investments are specific products designated as such available
from banks and long-term insurers. In other words, they are specific investments that meet the
necessary criteria and that are available to the general public.
A natural person is allowed to contribute up to R33 000 cash during a year of assessment to
these investments and a lifetime contribution limitation of R500 000 is applicable. This excludes
any reinvestment of interest and dividends received.
If a natural person exceeds the above stated limits the person will be penalised by having 40% of
the excess contribution, deemed to be normal tax payable. The amounts received will, however,
still be exempt from tax although the taxpayer contributed in excess of the limits.
EXAMPLE 4.5
Required:
Calculate Mpho’s taxable investment income for the 2087 year of assessment.
Information:
Mpho, a 32-year-old, unmarried South African resident, received the following investment income for the 2018
year of assessment:
R
Interest received – foreign bank 2 500
Interest received – tax-free investments 3 000
Dividends received – foreign companies (taxable portion) 1 300
Solution
R R
Gross income
Interest received – tax-free investments 3 000

Dividends received – foreign companies 1 300
35 800
Less: Exempt income

SA dividends 9 000
Foreign dividends (taxable portion given) –
Foreign interest – no exemption –
SA interest – tax-free investment 3 000
SA interest (R23 800 available, but limited to R20 000 (note) SA interest received) 20 000 (32 000)
Income 3 800
Note:
The exemption cannot be more than the interest received. R20 000 was received therefore the full amount is
exempt from tax. This actually means that the amount received is not taxed at all.
EXAMPLE 4.6
Required:
Calculate Santie’s taxable investment income for the 2018 year of assessment.
Information:
Santie, who is 66 years old, a widow and a South African resident, received the following investment income
for the 2018 year of assessment:
R
Interest received – South African collective investment scheme 40 000
Dividends received – tax-free investment 2 500
Dividends received – foreign companies (she holds 15% equity shares and voting rights) 1 900
(continued)
Solution
R R
Gross income
Interest received – South African collective investment scheme 40 000
Interest received – foreign 2 500
Dividends received – tax-free investment 2 500
Dividends received – foreign companies 1 900
61 900
Less: Exempt income

Dividends received – South African companies (exempt in terms of sec- 15 000
tion 10(1)(k)
Dividends received – tax-free investments (exempt in terms of section 12T) 1 500
Foreign dividends – qualifies for a section 10B exemption 1 900
Foreign interest – no exemption –
SA interest (R34 500 is available and SA interest is R40 000) 34 500 (52 900)
Income 9 000
If a taxpayer is married in community of property, all the investment income (passive income) (refer to
note below) of the taxpayer and his or her spouse must be declared. 50% of this total investment
income will be included in the gross income of each taxpayer and each taxpayer will be entitled to
the full exemption.
Investment income is all the ‘passive’ income that a person received other than income
earned from a trade – including the renting of fixed property (even though renting is
regarded as a trade). ‘Passive’ income is income received usually from an investment
made by the person and for which that person did not have to work actively. ‘Passive’
income will not include a salary, as the person had to work actively to earn the salary
income.
Investment income, split between the taxpayer and his or her spouse, is thus:
• rental income;
• interest income;
• dividend income;
• annuity income.
The taxpayer and his or her spouse are each entitled to the full interest exemption in their
own individual tax calculations. SARS will split the gross income amounts, but not the
available exemptions.
J Unemployment insurance benefits

Section 10(1)(mB) provides that benefits made in terms of the Unemployment Insurance Act 63 of
2001 are exempt from normal tax. This means that if a person becomes unemployed, and
receives payments (benefits) from the Unemployment Insurance Fund, these payments will be
exempt from normal tax.
J Death, disability, illness or unemployment policy benefits
Section 10(1)(gl) provides that amounts received by a taxpayer in terms of a policy that relates to
death, disablement, illness or unemployment of the policyholder or an employee of the policy-
holder will be exempt from normal tax.
J Bursaries and scholarships

Section 10(1)(q) provides that a genuine bursary or scholarship paid to an employee to study at a
recognised educational institution is fully exempt from normal tax. The exemption will not apply if
the employee is a relative of the employer (certain fixed amounts are exempt depending on the
qualification), or if the employee does not agree to repay the bursary in the event that studies are
unsuccessful.
4.5 Summary
The following structure is useful when calculating taxable income:
Gross income
General definition
• year or period of assessment
• any amount in cash or otherwise
• received by/accrued to/ in favour of
• excluding receipts or accruals of a capital nature
Specific inclusions
• annuities
• alimony
• amounts for services rendered
• restraint of trade payments
• lump-sum benefits
• fund benefits
• lease premiums
• know-how payments
• fringe benefits
• dividends and foreign dividends
• recoupments
Less: Exempt income

• South African dividends (including dividends from tax-free investments)
• South African interest exemption
i < 65 R23 800
i 65 R34 500
• South African interest from tax-free investments
• Foreign dividends – possible dividend exemption of full amount
• UIF payments
Equals: Income
The following decision tree is applicable when determining whether an individual is a resident of
South Africa:
Is the person ordinarily resident in South Africa?

In other words:
Is South Africa the country to which the person would return
from his or her wanderings OR the country which the person regards
as his or her real home?
YES NO
Was the person physically

present in South Africa for more
than 91 days in total during the
current year of assessment?
YES NO

than 91 days in total during
each of the previous 5 years
of assessment?
YES

than 915 days in total during the
previous 5 years of assessment?
YES NO
Resident Non-resident
The following is a summary of the exemptions applicable to investment income for South African
residents:
Taxpayer earns investment income
South African Foreign Foreign South African

dividends dividends interest interest
• Include in gross Include in

• Include in gross
income gross income
income
• Fully exempt in terms
• No exemption
of section 10
• Exempt if it is received
from tax-free invest-
ments
• Include in gross income

• Age of taxpayer:
Does not Qualifies i < 65 – R23 800 exempt, but
qualify for a specific for a specific to a maximum of SA interest
exemption exemption received
• Amount not • Amount that i 65 – R34 500 exempt, but
exempt = fully qualifies is to a maximum of SA interest
taxable exempt
received
• Exempt if it is received from tax-
free investments

1. What income does the Income Tax Act subject to South African tax in respect of a resident?
2. What income does the Income Tax Act subject to South African tax in respect of a non-resident?
3. List the four requirements of the general definition of gross income for a resident.
4. List the requirements for the physical presence test.
5. When does an amount accrue to a taxpayer?
6. List the two types of broad tests, with their sub-categories, to determine whether a receipt or an
accrual is of a capital nature or not.
7. List the specific inclusions in gross income that apply to salaried persons.
8. Madge Miss is a student who lives in a flat close to the campus. She ‘spies’ for the security
company who provides the security to the block of flats. Every six months, she compiles a report
of suspicious activities and the security company pays her an amount of R5 000 upon receipt of
the report. During the 2018 year of assessment, she received R10 000 in total. Discuss whether
Madge should include the R10 000 in her gross income.
9. True or false: 50% of interest income will be included in the gross income of each taxpayer if
they are married in community of property and each taxpayer will be entitled to a 50% interest
exemption.
10. What is the maximum amount of South African interest (excluding interest from tax-free invest-
ments) that can be exempt from income tax for a South African individual under and above the
age of 65, respectively?
11. True or false: foreign dividends are exempt for income tax purposes.
12. True or false: South African dividends are exempt from income tax if they have been subject to
dividends tax.
13. True or false: Dividends and interest received from tax-free investments are fully exempt irre-
spective whether the annual or total investment limits have been exceeded.
14. Kenny Tax sells and delivers trading stock on 15 February 2018 for R35 000. Payment is only
due in eighteen months. Assume that the value of the R35 000 received is R20 000 at the end of
the year of assessment during which Kenny sold the trading stock. What amount will be included
in Kenny’s gross income for the 2018 year of assessment? Indicate the date of accrual and pro-
vide a reason for your answer.
15. Mr and Mrs Sage are married in community of property. They are both 50 years old and ordinar-
ily resident in South Africa. He received South African interest of R40 000 (does not include in-
terest received from a tax-free investment) and his wife received net rental (after deduction of al-
lowable tax expenses) amounting to R80 000. These amounts were received during the current
year of assessment. Mrs Sage only received the rental income for the current year of assess-
ment. Calculate the income of Mrs Sage for the current year of assessment.
16. Max Jacobs sells his private computer and realises a profit on the sale. He is a teacher at a
private school. Will the profit be of a capital nature? Provide a reason for your answer. Would
your answer be different if Max Jacobs were to sell second-hand computers after hours to sup-
plement his teacher’s salary? Provide a reason for your answer.
Answers
Answers
CHAPTER
5 General, Prohibited and Specific Deductions

Author: E Hamel
Contents
Page
5.1 Introduction ........................................................................................................................... 100
5.2 General deductions............................................................................................................... 101
5.2.1 Carrying on of a trade ............................................................................................... 102
5.2.2 Section 11(a) of the Income Tax Act 58 of 1962 (as amended) .............................. 102
5.3 Prohibited deductions ........................................................................................................... 105
5.4 Prepaid expenses ................................................................................................................. 106
5.5 Specific deductions .............................................................................................................. 106
5.6 Cost of assets and value-added tax ..................................................................................... 110
5.7 Summary ............................................................................................................................... 112
99
After studying this chapter, the reader should

9 know and apply the requirements for deducting expenses of a general nature in terms of the
Income Tax Act 58 of 1962 (as amended) (the Income Tax Act).
9 know what general amounts are deductible by a salaried taxpayer.
9 know what transactions will result in amounts that are not deductible or prohibited from being
deducted.
9 know some of the specific deductions that can be claimed by salaried taxpayers or sole
traders.
5.1 Introduction
In chapter 3, the specifically allowed deductions for salaried taxpayers, as provided by the Income
Tax Act, were mentioned. This chapter will expand on these specific deductions and look at the
general deductions that might be deductible by any taxpayer, specifically using examples applicable
to salaried taxpayers. The requirements for deducting expenses of a general nature, as laid out in the
Income Tax Act, will also be examined.
R
Less: Deductions and allowances (section 11 – except for s11F; subject to (xxx)
section 23(m))
Normal tax calculated, based on the tax tables xxx

Equals: Normal tax due by or to the taxpayer (xxx)
Equals: Total tax liability of natural person (xxx)
Further to this, chapter 5 will discuss the deductions that the South African Revenue Service SARS)
specifically does not allow for reducing taxable income in terms of the Income Tax Act.

J General deductions J Prohibited deductions (section 23)
J Carrying on of a trade J Specific deductions
J Prepaid expenses J Cost of an asset
J Section 11(a)
Chapter 5: General, Prohibited and Specific Deductions 101
5.2 General deductions

After having calculated a taxpayer’s income (i.e. gross income in terms of the general definition and
specific inclusions) less exempt income (income that was included in gross income, but is not taxa-
ble in terms of section 10 of the Income Tax Act), one can reduce this income by the allowable de-
ductions in terms of the Income Tax Act. SARS allows deductions in terms of the following sections of
the Income Tax Act:
• the general deduction formula (section 11(a), read with section 23(g));
• specific deductions (the rest of section 11 to section 19).
Chapter 3 focused on the specific deductions that a taxpayer can make when earning income from
employment. This section of chapter 5 will look at the general requirements for deducting expenses
that are not of a specific nature. An individual will incur these types of expenses when entering into a
trade. The different kinds of trade that a natural person can enter into are virtually unlimited. This
‘general deduction formula’, as it is called, is applicable to all types of taxpayers.
People often refer to the ‘general deduction formula’ when discussing the deductibility of expenses.
What is actually being referred to are the requirements set out in section 11(a) and 23(g), but along
with those requirements, the prohibited deductions (expenses that specifically may not be deducted)
that are contained in section 23 must also be considered. When an enterprise, company or close
corporation calculates its taxable income, these requirements also apply.
There is a general definition for gross income, and along with this, legislation also pro-
vides for the inclusion of specific types of income (even though these might not be
included if only the general definition is applied). The same is true for deductions: the
Income Tax Act provides for a general deduction, but also a list of specifically excluded
or prohibited deductions.
The Income Tax Act stipulates the requirements that the taxpayer’s expenses must comply with in
order to deduct expenses that are of a general nature. However, other expenses that the legislator
did not want to be deducted might also comply with the requirements and become deductible for tax
purposes; therefore, section 23 lists certain expenses that, although they might comply with the
deduction requirements, may not be deducted for income tax purposes.
As with the definition of ‘gross income’, the requirements for deducting general expenses can also be
broken down into parts. Section 11 reads as follows:
For the purpose of determining the taxable income derived by any person from carrying on any trade,
there shall be allowed as deductions from the income of such person so derived,
(a) expenditure and losses actually incurred in the production of the income, provided such expenditure
and losses are not of a capital nature.
Section 23(g) reads as follows:
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.
From the above, the following abbreviated requirements are evident:
• carrying on of a trade;
• income from the trade;
• expenditure and losses;
• actually incurred;
• in the production of income;
• not of a capital nature;
• partially or fully expended for the purposes of trade.
In terms of the general deduction provisions, an amount must comply with all the above
requirements in order for the amount to be deducted.
Once again, in order to be able to apply these requirements, one needs to look at each requirement
separately and understand what the Income Tax Act requires before an amount may qualify as a
deduction.
5.2.1 Carrying on of a trade

‘Trade’ is defined in section 1 of the Income Tax Act; in a summarised form, it is
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, or any design or any trade mark, or
any copyright, or any other property which is of a similar nature.
From the summarised definition, it is clear that ‘trade’ covers a very wide range of activities. It is
important to note that it specifically includes rental. Even though the definition is very wide, it does
not include investment income (interest and dividends) as being income from a trade, and it also
does not include pensions and other annuities received. This, in theory, means that SARS will not
allow expenditure that relates to this type of income as a deduction for income tax purposes. While
this is true for pension and annuity income, in practice SARS does allow investors to deduct interest
incurred in the earning of investment income. The interest incurred may not be greater than the
interest income (unless the person is a moneylender), which means that the investor may not create a
loss by borrowing at an interest rate higher than the interest rate that he or she earns.
The term ‘carrying on of a trade’ (used in the preamble (introduction) to section 11) means that there
must be some form of continuity of the activities of the trade and that it should be a long-term object-
ive of the trade to generate a profit. Although continuity and profit motive are not prerequisites (condi-
tions) for the carrying on of a trade, it is important to look at the activities of the taxpayer as a whole in
order to establish whether the taxpayer is actually carrying on a trade.
Expenditure and losses are normally only deductible if a trade has commenced. However, sec-
tion 11A allows a deduction prior to the commencement of a trade under certain circumstances.
5.2.2 Section 11(a) of the Income Tax Act 58 of 1962 (as amended)
An amount must comply with all the requirements of section 11(a) for the amount to be deductible for
income tax purposes. If an expenditure or loss does not comply with even one of the requirements, it
will not be deductible. The complete list of requirements is as follows:
J Expenditure and losses

The way in which expenses are treated in accounting practice does not apply in any way to
determining whether expenses are allowed for income tax purposes or not. This means that a
person needs to ignore what the accounting practice is with regard to deducting expenses when
deducting amounts for income tax purposes.
The Income Tax Act refers to both expenditure and losses. There does not really seem to be a
difference between the two, and this requirement does not cause problems when applying it in
practice.
The courts have recently held that ‘expenditure’ is not restricted to the spending of cash; it can
be any form of payment.
J Actually incurred
When, for tax purposes, one has to decide whether the taxpayer has actually incurred an
expense, one does not have to question whether the taxpayer should have incurred the expense
in carrying on the trade or not. As long as the taxpayer has incurred the liability (having to pay the
money), the expense will be deductible for income tax purposes. Even extravagant expenses,
therefore, will be deductible as long as the taxpayer has incurred the expense. The Commis-
sioner can disallow the excessive portion of an expense, as he or she can view it as not incurred
in the production of income. ‘Incurred’ means more than paid; a taxpayer cannot deduct an
amount just because he or she paid the amount. The inclusion of the words ‘actually incurred’ in
the requirements for an amount to be deductible resulted in the fact that where a person makes
any provisions for expenditure, future expenditure and expected expenditure, these provisions
will not be deductible for income tax purposes, because the taxpayer has not incurred these
provisions. If a contingent liability exists, it is not expenditure actually incurred and it will not be
deductible. It is also prohibited in terms of section 23.
The following court cases include specific decisions that relate to the words ‘actually incurred’:
Caltex Oil SA Ltd v SIR (1975 AD):

Where an expense has been paid and the payer has no right to recover any part of the
amount, the expense has been ‘incurred’ even if the payer has not received the goods or
services.
Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD):
So long as expenditure is incurred, it will fulfil this requirement; although the words say
‘actually’, the expense does not have to be necessarily incurred.
Edgars Stores Ltd v CIR (1988 A):
Expenditure is only deductible in the year in which an unconditional legal obligation has
been incurred. If the obligation was initially incurred as a conditional one during one year
of assessment and the condition is only met in a later year of assessment, then the ex-
pense will only fulfil this requirement in the later year of assessment and it will only be
deductible in the later year.
If an expense has not been paid, it will only be considered to be incurred when the tax-
payer has received the goods or services, and the taxpayer, as the buyer, then has an
obligation to pay.
J During the year of assessment

There is no mention of this requirement in section 11(a), but as the Income Tax Act is applicable
to a year of assessment, this is implied. The courts have also ruled so in this regard.
In Sub Nigel Ltd v CIR (1948 AD), it was held that the ‘whole scheme of the Income Tax
Act shows that, as the taxpayer is assessed for income tax for a period of one year, no
expenditure incurred in a year previous to the particular year can be deducted’.
This means that the taxpayer can only claim the expenditure once (i.e. in the year actually in-
curred). If the date of payment differs from the date incurred, the taxpayer cannot claim it again.
J In the production of income

It is difficult to test this requirement. In terms of this requirement, one can only deduct expend-
iture if the person incurs it with the purpose of producing income. There are a number of cases in
this regard, the most important decision being the following:
In Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD), the court held that ‘the
purpose of the act [of] entailing expenditure must be looked to. If it is performed for the
purpose of earning income, then the expenditure attendant upon it is deductible . . .’
The judge also stated that ‘all expenses attached to the performance of a business
operation bona fide performed for the purpose of earning income are deductible whether
such expenses are necessary for its performance or attached to it by chance or are bona
fide incurred for the more efficient performance of such operation provided they are so
closely connected with it that they may be regarded as part of the cost of performing it’.
What the court is actually saying is that one must first identify the act that led to the taxpayer
incurring the expenditure, and then consider whether the purpose of the act was to produce
income. Once this is established, the expenditure must be closely connected or linked to that act.
It does not mean that the expenditure must produce income, but rather the act leading to the
expenditure incurred must produce income. It can be explained as follows: The taxpayer is a
transport business and the driver of one of the trucks is involved in an accident. The driver
passes away and the taxpayer pays compensation to the family of the driver. Is the compensation
incurred in the production of income? The act which gave rise to the expense is the employment
of the driver by a transport business. Being a transport business, the employment of drivers is
necessary for this type of business and the employment of drivers carries with it a risk of drivers
being injured in the course of their employment due to road accidents and that compensation for
such injury could arise. There is an inherent risk in this type of business and some accidents are
simply not avoidable and thus an ‘inevitable concomitant’. As such, the resulting expenses are al-
lowed as a deduction. The expense is closely linked to the income-earning activity (transport
business) and thus in the production of income.
Take note that this requirement does not mean that the expenditure may only be
deducted once the income has been produced. However, where the taxpayer incurs the
expense only after the production of income, it will be much more difficult to prove that
there is a close link between the expenditure and the income.
J Not of a capital nature

Just as income of a capital nature is excluded when calculating ‘gross income’ (refer to chap-
ter 4), expenses of a capital nature are also excluded. As with ‘gross income’, the term ‘capital
nature’ is not defined, which can lead to court decisions in order to solve the capital issues that
are more involved.
Remember that the focus of this chapter is on the requirements regarding a general
deduction. Taxpayers might be aware of some specific allowances in other sections
(11–19) of the Income Tax Act that provide for the deduction of capital allowances. It is
probably because of this requirement that the Income Tax Act makes provision for many
of those specific allowances.
In CIR v George Forest Timber Co Ltd (1924 AD), the judge said: ‘money spent in creat-
ing or acquiring an income-producing concern must be capital expenditure. It is invested
to yield a future profit; and while the outlay does not recur, the income does. There is a
great difference between money spent in creating or acquiring a source of profit and
money spent working it. The one is capital expenditure, the other is not.’
How can one determine, accordingly, whether expenditure is of a capital nature or not? If the
expense forms part of the cost of purchasing an asset that will form part of the taxpayer’s income-
producing structure, the expense will be of a capital nature (New State Areas Ltd v CIR
(14 SATC 155)). In addition, if the expense creates an enduring benefit or a long-lasting benefit, it
will be of a capital nature. A distinction is made between expenses relating to the income-
producing structure (assets) and those relating to the income-producing operations (day-to-day
activities).
If an expense is not of a capital nature, it is of a revenue nature and, therefore, deductible. A
payment made by a taxpayer for the use of an asset is of a revenue nature.
An example of capital expenditures relating to the income-producing structure:
• purchase of assets, for example a car, house, or antiques.
Examples of revenue expenditures relating to the income-producing operations:

• rent paid; and
• interest paid.
If a manufacturing business purchases a manufacturing machine, then the cost of the machine
would be a capital expense (the business is adding to the income-earning structure) whilst the
cost of running the machine (maintenance) and employing people to operate the machine would
be of a revenue nature (performing income-earning operations).
Remember that an amount must comply with ALL the requirements of section 11(a) in
order for the amount to be deductible for income tax purposes.
5.3 Prohibited deductions

Some expenditure that the legislator never intended to be deductible, might in fact qualify as deduct-
ible when applying the section 11(a) requirements. Section 23 specifically disallows or prohibits the
deduction of certain expenses.
The prohibited expenses are as follows:
• cost of maintenance of the taxpayer, his or her family or home;
• domestic or private expenses (deductions in respect of a home study and a part of a house
occupied exclusively for the purpose of trade are specifically allowed under limited circum-
stances);
• losses that are insured;
• tax, penalties, and interest on tax;
• provision for expenditure;
• expenses incurred to produce exempt income, for example, South African dividends;
• expenses incurred in the production of foreign dividends;
• interest that could have been earned (notional), had the taxpayer invested the money in a bank
instead of using it for a different purpose;
• expenditure relating to employment (refer to discussion below); or
• fines and other unlawful activities, for example, bribes or kickbacks.
Some of the specific deductions that a person can deduct when earning income from employment
were discussed in chapter 3. These deductions are specified and limited or prohibited from being
deducted in terms of section 23(m).
Section 23(m) specifically disallows the deduction of expenditure that relates to employment. This
section applies to persons who earn income in the form of remuneration. It does not apply to taxpay-
ers who earn remuneration mainly (more than 50%) in the form of commission based on sales or
turnover. Section 23(m), apart from prohibiting any deductions against income from employment,
also contains a specific list of permitted expenses. Interpretation Note 13 deals with section 23(m),
while Interpretation Note 28 deals with the deductibility of home office expenses. More details per-
taining to these interpretation notes are available on the SARS website (http://www.sars.gov.za).
Chapter 3 dealt with some of these permitted deductions. The following list contains all the expenses
that a person may deduct when earning remuneration from employment only:
J Legal expenses incurred in the production of employment income. An employee may claim any
legal expenses incurred in respect of any claim that is directly related to his or her salary pack-
age; for example, if the employee takes a concern regarding the short payment of his or her
salary to the Commission for Conciliation, Mediation and Arbitration (CCMA), any legal expenses
incurred by this employee can be deducted for income tax purposes.
J Wear and tear allowances in respect of expenditure incurred in the production of employment
income. A person will calculate wear and tear by dividing the cost of the asset by the number of
years that the asset has an expected useful life. The number of years is available in General Bind-
ing Ruling 7 (refer to the schedules at the end of this book).
SARS only allows the deduction of wear and tear on assets that a person uses in earning
salary income. Therefore, if an employee owns an asset (e.g. a computer) and he or she
is obliged to use it regularly to perform tasks relating to his or her job, this employee will
be entitled to claim wear and tear (depreciation) on it.
J Bad debts allowance in respect of expenditure incurred in the production of employment in-
come. For example, where an employee can prove that the employer has not paid a salary, but it
has been included in his or her ‘gross income’ in the current year of assessment or in a previous
year, this employee may claim the amount as a deduction.
J Doubtful debts allowance in respect of expenditure incurred in the production of employment

income. For example, where an employee can prove that there is a reason to believe that a salary
will not be paid, a doubtful debts allowance of 25% of the amount can be claimed. The taxpayer
must add back (include) the amount he or she deducted in Year 1 to his or her taxable income in
Year 2.
J Home study expenses. Where an employee, as a condition of his or her service, has to bear the
cost of maintaining a home office as his or her central business location, these costs may qualify
as a deduction in terms of the Income Tax Act. These expenses will include rent, repairs, or other
expenses in connection with any house or domestic premises. The employee can only claim
these deductions if they comply with the requirements of section 11(a) ‘general deduction for-
mula’ or 11(d) ‘repairs’. Wear and tear can also be claimed, subject to the provisions of sec-
tion 11(e).
J Restraint of trade and other amounts. Where an amount or restraint of trade payment has been
included in a taxpayer’s taxable income and the taxpayer has refunded it, the taxpayer may claim
a deduction for the refunded amount.
J Contributions to retirement funds (refer to chapter 3).
J Donations to public benefit organisations (refer to chapter 3).
Individuals who are in employment may not deduct any other expenses for income tax
purposes. Section 23(m) does not apply to a taxpayer who earns income mainly (more
than 50%) in the form of commission from sales.
5.4 Prepaid expenses

Section 23H makes provision for the limitation of allowable expenses (these expenses must be de-
ductible in terms of section 11(a)) if the expenses relate to goods or services that will not be supplied
during the current year of assessment. Apportionment of the expenses is made between the portion
of the expenses that is applicable to the current year of assessment and the portion of the expenses
that is applicable to the following year of assessment. In other words, the taxpayer cannot claim the
prepaid portion of the expenses relating to the following year of assessment in the current year of
assessment. This section does not apply to the purchase of trading stock. Remember, the account-
ing and tax treatment of prepaid expenses may differ.
Expenses will not be limited/apportioned where:
• the goods or services will be supplied within six months after the end of the current year of
assessment; or
• the total amount of prepaid expenses incurred during the current year of assessment is less than
R100 000; or
• the amount is payable in terms of legislation (e.g. property rates which are payable in terms of
municipal legislation).
5.5 Specific deductions

Apart from deductions of a general nature (as discussed above), a taxpayer who is involved in a
small trade, or a hobby that has become a trade, is able to claim certain other deductions. Some of
these deductions that one should be aware of when dealing with the Income Tax return of individuals,
will be covered briefly.
J Legal expenses (section 11(c))

Legal expenses, according to the Act, are fees for the services of legal practitioners; expenses
incurred in procuring evidence or expert advice; court fees; witness fees and expenses; taxing
fees; the fees and expenses of sheriffs or messengers of the court; and other costs of litigation
similar to any of these.
The deduction of legal fees is limited to:

• expenses that are not of a capital nature;
• expenses incurred in respect of claims or damages made against the taxpayer; however, the
claims or damages must be deductible in terms of section 11(a) in order for the legal
expenses to be deductible. In other words, there are two amounts, the claim amount and the
other costs are the legal costs incurred in defending the claim;
• expenses incurred in respect of claims made by the taxpayer; however, the claims made
must be income of the taxpayer when received in order for the legal expenses to be deduct-
ible; or
• expenses incurred in respect of disputes relating to the previous two points; however, these
will only be deductible if the claims against the taxpayer, or made by the taxpayer, are
deductible from or included in income respectively.
J Restraint of trade (section 11(cA))

The Income Tax Act allows a deduction where a taxpayer pays a restraint of trade payment to an
employee. The amount deducted in the year of assessment must be the lesser of:
• the restraint of trade payment incurred ÷ the number of years that the restraint is effective; or
• the restraint of trade payment incurred ÷ 3 years.
For this amount to be deductible, the restraint payment must be taxable in the hands of the per-
son receiving it.
EXAMPLE 5.1
Required:
Calculate the deduction that Dan will be allowed to claim in respect of the restraint of trade payment he made
to Stef during the current year of assessment.
Information:
Dan, a dentist, operates a practice from his residential property. He has trained his receptionist (Stef) to assist
him when his dental assistant is not available. He paid her R90 000 to ensure that she does not go and work
for another dentist in the area for the next four years.
Solution
The deduction that is allowed, is the lesser of
the payment/number of years = R90 000/4 years = R22 500; or

the payment/3 years = R90 000/3 = R30 000
Therefore, Dan will be able to deduct R22 500 in the current year of assessment, as well as R22 500 during
each of the following three years of assessment. The amount will be taxable in the hands of Stef as she was
an employee of Dan, the dentist; in other words, the R90 000 is included in Stef’s gross income in the current
year of assessment.
J Repairs (section 11(d))

Expenditure incurred when repairing a property used by a taxpayer for the purpose of his or her
trade, as well as expenses incurred for treatment against attacks by beetles of any timber, repair
of machinery, implements, utensils and other articles employed by the taxpayer for the purpose
of his or her trade, will be deductible.
The costs of repairs to a property used by the taxpayer for the purpose of his or her trade, or
a property from which income is receivable, must actually be incurred during the year of
assessment.
There is a difference between an improvement and a repair. An improvement will generally in-
crease the capacity of the asset whilst a repair is an expense to bring the asset back to its ori-
ginal condition.
An improvement might qualify for a wear and tear allowance.
If amounts are not deductible, it might be added to the base cost of the asset (refer to chapter 7).
J Wear and tear (section 11(e))

Where taxpayers’ own assets that are used in their trade (excluding buildings, manufacturing
machinery, aircraft and hotel assets), they are allowed to deduct an amount that represents the
cost of the usage of the asset.
Remember: the asset is considered to be of a capital nature; therefore the cost of the
asset will not be deductible in terms of section 11(a).
Section 11(e) does, however, make provision for the value of the asset to be written off over the
useful life of the asset. In order to minimise the discussion of what the useful life of certain assets
is, SARS has provided Binding General Ruling 7 (refer to the schedules to this book) which con-
tains details of what is considered to be the useful lifespan of different classes of assets. The
‘useful’ lives provided by SARS are not law and taxpayers can challenge these rulings.
Where a taxpayer did not use an asset for a full year, the deduction must be reduced, to repre-
sent the period for which the taxpayer actually used the asset for the purpose of his or her trade.
In other words, the apportionment of the wear and tear amount will be based on the number of
days or months used in the trade.
Binding General Ruling 7 states that small items (items must not be part of a set and must be
used on their own) costing less than R7 000 may be written off in full in the year of assessment in
which they are purchased and brought into use.
EXAMPLE 5.2
Required:
Calculate the deduction that Cindy will be allowed to claim for the 2018 year of assessment in respect of the
sewing machines that she uses in her dressmaking business.
Information:
Cindy is 37 years old and runs a dressmaking business from her home.
(a) On 1 March 2017, Cindy purchased a new sewing machine for R25 000, for exclusive use in her busi-
ness.
(b) On 30 October 2017, Cindy purchased a new sewing machine for R30 000, also for exclusive use in her
business.
(continued)
Solution
(a) Cindy will be allowed to claim the cost of the machine, spread over its useful life, as a deduction. In
order to ascertain the useful life, refer to Binding General Ruling 7, which indicates that the useful life of
sewing machines is 6 years. Therefore:
R25 000/6 years = R4 167 (rounded) per year, deductible for 6 years.
(b) Once again, the cost is spread over the useful life of the sewing machine:
R30 000/6 years = R5 000 per year, deductible for 6 years.
However, in this case the machine was not used for the full year of assessment as it was only purchased
on 30 October: it was in use for the period November–February (4 months).
Therefore, the allowable deduction needs to be reduced in the current year to give effect to the usage of
the asset. This is done by reducing the amount pro rata, i.e. R5 000 × 4/12 = R1 667 (rounded).
Note that the ‘4’ represents the months that the asset was in use during the current year of assessment
and the ‘12’ represents the number of months in the current year of assessment.
J Premiums paid (section 11(f))

The Income Tax Act allows a deduction where a taxpayer pays a premium (that is taxable in the
hands of the person receiving it) in respect of the right of use (when used in the taxpayer’s trade)
of:
• land or buildings;
• plant and machinery;
• patent, design or copyright;
• imparting of knowledge related to any patent, design or copyright.
The deduction is calculated as follows:
Premium Paid
Number of years entitled to use (maximum 25 years)
J Improvements to land and buildings by a person who is not the owner (section 11(g))
Where a taxpayer is obliged to make improvements to land and buildings (owned by someone
else), which he or she has the right to use, the Income Tax Act makes provision for a deduction.
The improvements must be made in terms of an agreement between the taxpayer and the owner
of the assets, and the taxpayer must use the land and buildings in the furtherance of his or her
trade.
Amount stipulated in agreement for improvements
Number of years remaining after the improvements are completed (maximum 25 years)
J Bad debts (section 11(i))

Where a taxpayer has debts that have gone bad during the current year of assessment, these
may be deducted, provided that they were was included in the taxpayer’s income during the cur-
rent or previous year of assessment. A debt becomes bad when the debtor is not able to repay
the amount that is outstanding on the debt owed.
J Doubtful debts (section 11(j))

The Income Tax Act allows the deduction of an allowance each year that represents a portion
(normally 25%) of the list of debts that the taxpayer considers as doubtful (the debts that the
taxpayer does not think he or she will recover). This allowance must be included in the taxpayer’s
income in the following year of assessment. In other words, it is added back in the next year.
J Other deductions (section 11(x))

In terms of section 11, provision is made that other deductions contained in this Part of the Act
are deductible.
J Payments that are refunded by the taxpayer (section 11nA and 11nB)
Where a taxpayer has included amounts in his or her income (from employment, services ren-
dered or restraint of trade payments) and the taxpayer has refunded it, he or she will be entitled
to a deduction equal to the amount refunded.
J Allowances on buildings (section 13 and 13quin)

Buildings used in a process of manufacture
The cost of buildings that are used wholly or mainly by a taxpayer in the course of his or her
trade, in a process of manufacture, may be written off in the form of an allowance. The allowance
depends on the date on which a building was brought into use.
For buildings that the taxpayer constructed (built) or improved after 1 October 1999, the annual
allowance is 5% of the cost (not reduced pro rata). In other words, the taxpayer may deduct the
cost of the manufacturing building over a period of 20 years.
Commercial buildings
A taxpayer can claim an allowance on the cost of any new or unused commercial building, or
improvement (made after 1 April 2007) to such a building. An example of a commercial building
is a shopping mall or an office block. The taxpayer must own the building and use it in the pro-
duction of income. The annual allowance is 5% of the cost.
The cost will be the lesser of the:
• actual cost incurred; or
• cash cost of a transaction concluded at arm’s length (market value).
SARS will not allow any deduction where the building qualifies for another allowance/deduction.
5.6 Cost of assets and value-added tax
Where a taxpayer has incurred expenditure that is deductible for income tax purposes,
and he or she is registered for value-added tax (VAT) (and therefore entitled to deduct
input tax in terms of the VAT Act 89 of 1991 (the VAT Act)), the amount of VAT will be
excluded from the
• amount of expenditure to be deducted; or
• the cost of the asset that was used to calculate the allowance (section 23C).
EXAMPLE 5.3
Required:
Calculate the cost of the following assets that the taxpayer will be using as the basis of the wear and tear
allowance.
(a) Assume that Chris is registered for VAT purposes

(b) Assume that Chris is not registered for VAT purposes
Information:
Chris runs a carpet cleaning business. He purchased a desk for his office at the business for R15 390 includ-
ing VAT at 14%, and a coffee machine for exclusive use by his staff in the business for R3 500 including VAT
at 14%.
Solution
(a) Chris is registered for VAT purposes:
Desk
R15 390 × 100/114 = R13 500. The cost must be reduced by the VAT amount, as Chris is registered for
VAT purposes and entitled to claim input tax. Wear and tear will thus be calculated on R13 500.
Coffee machine
The cost will be R3 500, as in terms of the VAT Act, input tax is denied on assets purchased for enter-
tainment purposes (refer to chapter 9 for more details about VAT). Wear and tear will thus be calculated
on R3 500.
(b) Chris is not registered for VAT purposes:
Desk
R15 390 will be the cost on which he will base the wear and tear allowance, as Chris is not registered
and therefore not entitled to claim an input tax credit for VAT purposes.
Coffee machine
R3 500 will be the cost on which he will base the wear and tear allowance, as Chris is not registered and
the VAT rules do not apply to him (refer to chapter 9).
5.7 Summary
The following framework is useful when calculating taxable income:
Income
Less: General deductions

Section 11(a) and 23(g)
• carrying on of a trade
• expenditure and losses
• actually incurred
• during the year of assessment
• in the production of income
• not of a capital nature
• partially or fully expended for purposes of trade
Section 23 – prohibited expenditure
• maintenance of taxpayer
• domestic expenses
• insured losses
• taxes, penalties and interest on taxes
• provisions
• expenses in relation to exempt income
• expenses relating to foreign dividends
• notional interest
• expenses relating to employment
Less: Specific deductions (in order – see chapter 3)

• retirement fund contributions
• donations to public benefit organisations

1. What is excluded from the definition of trade?
2. Are the following statements true or false? Give reasons for your answer.
(a) One may only deduct an expense once the income has been produced.
(b) One may only deduct an expense that is necessarily incurred.
(c) As long as a taxpayer has paid an amount, it is deductible.
(d) Expenses of a capital nature are deductible in terms of section 11(a) as long as the taxpayer
incurs it in his or her trade.
(e) Expenses are only deductible in the year of assessment during which they are incurred.
3. List the requirements for an amount to be deductible in terms of the general deduction formula.
4. Explain what is meant by the term ‘in the production of income’. Apply the meaning to the follow-
ing facts:
Cassie trades as a florist and part of her business comprises the delivery of flower orders to
domestic and corporate addresses. She employed Bert as a delivery man. During one of his de-
liveries, he was bitten by a dog and Cassie incurred medical expenses amounting to R3 750 due
to his injuries. Briefly discuss whether the R3 750 was incurred in the production of Cassie’s in-
come.
5. Are the following statements true or false? Give reasons for your answer.
(a) Household expenses relating to groceries are not deductible for tax purposes.
(b) Interest paid on a loan which was used to purchase shares is deductible when dividends
are received in respect of those shares.
(c) The Income Tax Act allows the deduction of an allowance each year that represents a
portion (normally 25%) of the list of debts that the taxpayer considers to be doubtful.
(d) A loan of R2 500 was extended to an employee by a company which is not a banking institu-
tion. The employee left employment without giving notice and cannot be traced. The com-
pany has written the loan off as a bad debt. The amount of R2 500 will be deductible in
terms of the bad debt provision in section 11(i).
6. The Income Tax Act prohibits a taxpayer who earns only a salary from deducting expenses of a
general nature. Make a list of the expenses that a taxpayer earning only a salary will be able to
deduct.
QUESTION 7
Required:
Calculate Betty’s taxable income from her sewing business for the 2018 year of assessment. Round off
amounts to the nearest rand.
Information:
Betty Bright is a full-time secretary at BAS Ltd. As a lady with good entrepreneurial skills, she started sewing
fashion clothes for special functions in her spare time. Betty’s clothing business is doing very well. She con-
verted her garage into a sewing room and uses it exclusively for this purpose. Betty’s income and expenses
for the 2018 year of assessment for carrying on her fashion clothing trade were as follows:
R
Income 22 350
Expenses
In order to get through her workload over weekends, she contracted her housekeeper to assist her for 4 hours
on a Saturday morning with cutting and sewing. The cost of this service amounted to R8 125.
Betty also had to buy a new sewing machine and overlocker on 1 August 2017 to cope with the high volumes
of matric farewell dance dresses on order. The cost of the sewing machine and overlocker was R16 200. The
Commissioner has approved a six-year write-off period for the sewing machine and overlocker in terms of
Binding General Ruling 7.
Other costs incurred on the sewing machine and overlocker during the 2018 year of assessment were as
follows:
R
Maintenance 1 850
External hard drive for storing patterns 750
Betty has a 290 m2 house. The converted garage covers 25 m2 of the total area of 290 m2.
Interest incurred on mortgage loan (in respect of the whole house) during the current year of 28 125
assessment
Water and electricity (in respect of the whole house) 22 848
Betty gives only her cell phone number to her sewing business clients, as she does not want her home tele-
phone number to be known to customers. She estimates that she uses the cell phone 50% of the time in her
sewing business. The cell phone account for the 2018 year of assessment amounted to R3 900.
QUESTION 8
Required:
Calculate Freddie’s net normal tax for the 2018 year of assessment. Round off amounts to the nearest rand.
Information:
Freddie Mars is a lecturer employed by ACE Training Academy. Freddie is single and 36 years old. The fol-
lowing information relates to the 2018 year of assessment.
R
Income
Salary 490 000
Interest from a South African bank (not a tax-free investment) 24 000
Foreign dividends (taxable portion) 500
Expenses
Cell phone expenses (Note 1) 5 260
Legal expenses (Note 2) 600
Pension fund contributions 40 000
Medical expenses (Note 3) 21 734
Home office expenses (Note 4) 56 180
Notes:
1. Cell phone
Freddie’s employer requires him to own a cell phone so that students can contact him. Freddie has entered
into a contract with V-cellular. The contract stipulates that Freddie must purchase his own cell phone for a fee
of R100 per month including VAT (of 14%) and that he will receive 120 free any-time minutes of airtime. Fred-
die may also purchase extra airtime as required. Freddie only entered into this contract on the 1st of May.
Prior to this date, he made use of his landline phone.
During the 2018 year of assessment, Freddie paid R1 000 in respect of the contract, and purchased R560 of
additional airtime. His cell phone cost him R3 700 including VAT (at 14%). Binding General Ruling 7 allows a
taxpayer to write off cellular phones over 3 years. Freddie uses his cell phone exclusively for business pur-
poses.
2. Legal expenses
During the year, Freddie entered into a new rental agreement for the townhouse that he lives in. He had to
pay legal fees of R600 in respect of the new agreement.
3. Medical fund contributions and expenses
During the year, Freddie contributed R1 232 per month to the medical fund. His employer did not contribute
anything to the fund. Freddie also paid for qualifying medical expenses of R6 950. Freddie has no depend-
ants.
4. Home office expenses

Freddie’s employer requires him to maintain a study at home for preparing all his lectures. He only attends the
campus of the Academy to present classes. The following expenses relate to the study. Freddie’s townhouse
is 150 m2 and the study comprises 14 m2.
R
Rent paid (in respect of the whole townhouse) 43 200
Water and electricity (in respect of the whole townhouse) 10 680
Stationery (in respect of his hobby) 1 670
Repairs to study 630
QUESTION 9
Required:
Calculate Jane’s net normal tax for the 2018 year of assessment. Round off amounts to the nearest rand.
Information:
Jane (28 years old and unmarried) works as a secretary at Ventura. She owns a house in Johannesburg,
which she rents out to earn some extra income. The same tenants rented the house for the full year of assess-
ment. She had the following income and expenses for the current year of assessment:
R
Income
Salary 230 000
Gross rent received 56 000
Expenses
In relation to the rented house:
Legal expenses for drawing up a lease template to be used with all future tenants 1 600
Estate agent’s rental commission 3 600
Bond repayments (for this year, 40% represents the repayment of the original loan and the
balance is interest) 64 000
Erection of a wall around the property as it was open onto the road 13 000
Installation of a security system – 1 May 2017 10 000
Property rates and taxes 2 400
Payments to security company 6 390
Qualifying medical expenses paid for – Jane does not belong to a medical fund 5 689
Answers
Answers
CHAPTER Calculating the Taxable Income of a
6 Person receiving a Salary, Fringe Benefits

and Other Income
Author: E Hamel
Contents
Page
6.1 Introduction ........................................................................................................................... 118
6.2 Fringe benefits ...................................................................................................................... 119
6.2.1 Acquisition of an asset at less than actual value ..................................................... 119
6.2.2 Right of use of an asset – other than residential accommodation
and a motor vehicle .................................................................................................. 121
6.2.3 Right of use of motor vehicle .................................................................................... 122
6.2.4 Meals, refreshments, or meal and refreshment vouchers ........................................ 130
6.2.5 Residential accommodation ..................................................................................... 131
6.2.6 Free or cheap services ............................................................................................. 134
6.2.7 Receiving low-interest debt ...................................................................................... 134
6.2.8 Contributions to a medical fund ............................................................................... 136
6.2.9 Costs relating to medical services ........................................................................... 137
6.2.10 Payment of employee’s debt or release of employee from obligation
to pay a debt ............................................................................................................. 138
6.2.11 Benefits to relatives of employees and others.......................................................... 138
6.2.12 Employer-owned insurance policies ........................................................................ 139
6.2.13 Employer contributions to retirement funds.............................................................. 139
6.3 Allowances ............................................................................................................................ 139
6.3.1 Travel allowance ....................................................................................................... 139
6.3.2 Subsistence allowance ............................................................................................. 147
6.4 Summary ............................................................................................................................... 149
117

9 calculate the taxable amount of the different fringe benefits.
9 calculate the taxable portion of a travel allowance.
9 calculate the taxable portion of a subsistence allowance.
6.1 Introduction
In chapter 3, salary income and investment income were discussed, while in chapter 4, the definition
of ‘gross income’ was covered. One of the specific inclusions in gross income is the taxable portion
of fringe benefits. The taxable portion of allowances is included in taxable income.
The focus of this chapter is on the various fringe benefits and allowances that an individual can
receive from an employer, and the calculation of the taxable amount of such benefits.

J Right of use of motor vehicle J Costs relating to medical services
J Right of use of an asset J Payment of an employee’s debt
J Acquisition of an asset at less than actual value J Release of an obligation to pay a debt
J Meals and meal vouchers J Benefits to relatives of employees
J Residential accommodation J Long-term insurance payments for the
J Free or cheap services benefit of employees
J Low-interest loans J Travel allowance
J Contributions to a medical fund J Subsistence allowance
R
• General definition
• Specific Inclusions (fringe benefits)

Chapter 6: Calculating the Taxable Income of a Person receiving a Salary, etc. 119
6.2 Fringe benefits

Fringe benefits are benefits that employers give to employees in a form other than cash (e.g. the
employer offers the employee the use of a company car in place of a portion of his or her cash
salary). The cost for the employer in all instances will be the same; however, the cost for the
employee of using a company vehicle for instance, may be less, as the amount that is included in his
or her taxable income may be lower than the cash salary. The employer must determine the cash
equivalent of the value of a taxable benefit (the value of the benefit used for private or domestic
purposes) and include the amount on the IRP5/IT3(a) certificate.
The definition of ‘gross income’ contains two specific inclusions that have the effect of including
fringe benefits in a taxpayer’s gross income. Paragraph (c) of the gross income definition includes all
amounts in respect of any employment, including voluntary awards for services rendered, as part of
gross income. Paragraph (i) of the same definition includes the cash equivalent of the value of any
benefit or advantage granted during the current year of assessment in respect of employment. Para-
graph (i) refers to the Seventh Schedule to the Income Tax Act 58 of 1962 (as amended) (the Income
Tax Act), and it is this Schedule that provides the rules for converting a specific fringe benefit into a
rand amount, which then needs to be included in the employee’s gross income.
Fringe benefits can only exist where there is an employer-employee relationship (i.e. a
master and servant relationship). Therefore, if a person runs his or her own business, for
example as a sole proprietor, there cannot be fringe benefits for tax purposes.
The following paragraphs contain a discussion of the calculation of the taxable amount of the various
fringe benefits, namely:
• acquisition (purchasing) of an asset at less than actual value;
• right of use of any asset (other than residential accommodation and a motor vehicle);
• right of use of a motor vehicle;
• meals, refreshments and meal and refreshment vouchers;
• residential accommodation;
• free or cheap services;
• benefits in respect of interest on loans;
• contributions to a medical fund;
• contributions to retirement funds;
• payment of employee’s debt or release of employee from obligation to pay a debt;
• benefits granted to relatives of employees and others;
• long-term insurance payments by an employer for the benefit, or on behalf of an employee.
The Seventh Schedule provides the rules that explain how to value a fringe benefit for
income tax purposes. If there is no rule in the Schedule, one will have to determine if the
amount should be included in terms of paragraph (c) of the definition of ‘gross income’,
as paragraph (c) includes any amount, including any voluntary award received for ser-
vices rendered, in the gross income of a person.
If the employee had to pay for the fringe benefit (also known as consideration), the gen-
eral rule is that any value of the benefit (the taxable amount) that is calculated in terms of
the Seventh Schedule can be reduced (made smaller) by this payment (consideration).
Cash equivalent (amount to be included in gross income) = Value of the fringe benefit .
consideration paid by the employee
6.2.1 Acquisition of an asset at less than actual value

If an employee purchases an asset from his or her employer (e.g. a computer), the amount that the
employee needs to include in taxable income is the market value (the value that a buyer is willing to
pay in an arm’s length transaction) of the asset (except movable property and trading stock), less
any amount that he or she paid for the asset.
If the asset purchased is movable property, the cost (the purchase price) to the employer, less any
amount paid by the employee, is the amount that must be included in taxable income.
• If the employee purchases some of the employer’s trading stock, the taxable benefit is the
lesser of market value or cost, less any amount paid by the employee.
The value of an asset presented to the employee as an award for bravery or long service (e.g. a gold
watch) will be reduced by the lesser of the cost to the employer or R5 000. Long service means an
initial unbroken period of service of 15 years or more, or any subsequent unbroken period of service
of 10 years or more. The R5 000 limit applies to each award within the specified periods.
A bravery or long-service award is taxable in full if presented in the form of a cash award.
EXAMPLE 6.1
Required:
Calculate the taxable benefit to be included in Victor’s gross income.
Information:
Phuza Breweries CC awarded Victor with an asset for 15 years of unbroken service. The asset cost Phuza
Breweries CC R5 600.
Solution
Taxable benefit to be included in gross income:
R5 600 – R5 000 (the lesser of R5 600 or R5 000) = R600 must be included in Victor’s gross income.
In many industries, such as the mining industry, it is common for the employer to provide accommo-
dation to its employees in order for the employees to conduct their duties. These employers often sell
the houses that they provide to their employees back to them at less than market value (usually at
cost value or even less than this value). This sale would be considered to be a fringe benefit as
discussed above; however, from 1 March 2014, no value will be placed on such a fringe benefit if the
following apply:
• the employee’s remuneration (in the previous year of assessment) is R250 000 or less; and
• the market value of the immovable property on the date of acquisition does not exceed R450 000;
and
• the employee is not a connected person in relation to the employer.
The reason for the relief from tax in these circumstances is that the Government wants to encourage
employer-assisted housing as part of its anti-poverty objectives and thus support employers in
providing low-income employees with affordable accommodation, thereby empowering their employ-
ees through home ownership.
EXAMPLE 6.2
Required:
Calculate the taxable benefit to be included in Thlele’s gross income during the current year of assessment.
Information:
Be Deers (Pty) Ltd employs Thlele to work on its mine in Cullinan and provides him with a house near the
mine so that he can carry out his duties at the mine. Thele is not connected to Be Deers (Pty) Ltd. At the
beginning of the current year of assessment Be Deers (Pty) Ltd sells the house that it provided to Thlele to
him for R150 000. The market value of this house R425 000. Thlele’s remuneration as at the end of the previ-
ous year was R100 000.
(continued)
Solution
Although the market value of the house is more than the consideration paid for it (R425 000 – R150 000), and
R275 000 would normally be taxed as a fringe benefit, because:
• Thele’s remuneration in the prior year is less than R250 000;

• the market value of the house is less than R450 000; and
• Thele is not connected to Be Deers (Pty) Ltd,
the taxable benefit to be included in Thele’s gross income in the current year of assessment is Rnil.
6.2.2 Right of use of an asset – other than residential

accommodation and a motor vehicle
Where an employer does not give the asset to an employee, but just allows him or her to use it (for
private or domestic purposes) for less than its useful life, the employer needs to place a value on the
usage. The reason for this is that the asset is owned by the employer, who is allowed (for tax purpos-
es) to claim certain allowances on the asset, but while the employee is using it for private or domestic
purposes, the employee is getting a benefit, and the asset is not being used by the employer for his
or her business.
Where an employee is granted the right of use of an asset for the full useful life of the
asset, the taxable benefit is calculated as though the employee acquired the asset at no
cost (refer to paragraph 6.2.1).
The employer is required to calculate the value of the private use of an asset at 15% per annum (a
year) on the lower of market value or the original cost. This means that where an employee will be
using an asset for less than a year, the employer will have to calculate the value by multiplying by
15%, dividing the result by 12, and then multiplying that result by the number of months that the
employee will be using the asset. In other words, the value is apportioned based on the period used
by the employee.
If the employer leases the asset (i.e. the employer does not own the asset), the rental payable by the
employer will be included in the employee’s gross income. This rule does not apply to the use of
motor vehicles or accommodation, as these assets have separate rules.
No amount will be included in the employee’s gross income in the following circumstances (meaning
that the use of these assets will be tax-free):
• where the private or domestic use of an asset by the employee is incidental to the business use
(this means that if the private use is so small as not to be significant, this usage will not be subject
to tax);
• where the asset is provided by the employer
(a) as an amenity to be enjoyed by the employee at his or her place of work, or
(b) for recreational purposes at that place of work, or
(c) as a place of recreation for the use of the employer’s employees in general;
• if the assets consist of books, other forms of literature, recordings, or works of art;
• if the asset is a machine or piece of equipment that the employer allows the employees, in gen-
eral, to use from time to time for short periods (this means that the South African Revenue Service
(SARS) will place no value on this private or domestic use if the value does not exceed an amount
determined as published in a public notice (this public notice was not published at the time of
writing this book)); and
• if the assets consist of telephone or computer equipment (e.g. printers, memory sticks, disks,
modems, or office-related software), which the employer allows his or her employees to use
mainly for purposes of the employer’s business, no value will be placed on the employees’ pri-
vate or domestic use of these items.
For income tax purposes, the term ‘mainly’ means more than 50%.
EXAMPLE 6.3
Required:
(a) Calculate the taxable fringe benefit to be included in George’s gross income.
(b) If George had to pay R50 per month to use the laptop, how much would be included in his gross
income?
(c) If George was given the laptop to use for business purposes, and he used it every now and then to type
a personal letter, how much would be included in his gross income?
Information:
George Stuart’s employer granted him the use of a laptop (owned by the employer) for private purposes for a
consecutive period of three months of the current year of assessment. The laptop cost R8 000 and the market
value is R7 500.
Solution
(a) R7 500 (lower than cost) × 15% × 3/12 = R281 will be included in George’s gross income. This benefit
does not have a Rnil value, as the laptop is not used mainly for the purposes of his employer’s business.
(b) Taxable benefit – any consideration paid

= R281 (as in (a)) – (R50 × 3 months)
= R281 – R150
= R131 will be included in George’s gross income
(c) As the laptop is used by George mainly for his employer’s business and the private use is only inci-
dental, no amount will be included in George’s gross income.
6.2.3 Right of use of motor vehicle

This fringe benefit arises when an employer gives an employee the right to
use a company-owned vehicle for private purposes. The taxable benefit for
the use of a company motor vehicle is calculated at 3,5% or 3,25% per month
of the determined value of such motor vehicle for each month that the
employee is entitled to use it for private purposes.
The determined value to be used in the calculation depends on the date that the vehicle was pur-
chased or manufactured. If the vehicle was purchased or manufactured before 1 March 2015 the
determined value is the original cost of the vehicle excluding interest and finance charges where the
vehicle was purchased by the employer in terms of a sale agreement, but if the vehicle was pur-
chased by the employer by means of a lease, the determined value is the market value at the time
the employer first obtained the right of use of the vehicle, or the cash value at the time the lease
(instalment credit agreement) was entered into. If the vehicle was obtained in terms of an operating
lease, the determined value is the actual cost incurred in terms of the operating lease and the cost of
the fuel.
If the vehicle was purchased or manufactured on or after 1 March 2015 the determined value is the
retail market value of the vehicle. This retail market value further also depends on the type of busi-
ness the employer is in. Below is a summary of how to calculate the retail value for the 2018 year of
assessment.
Table 6.2: Calculation of retail value
Type of business New or demo model vehicle Pre-owned

Manufacturer/importer Dealer Billing Price* (excl VAT) Cost (excl VAT) or if no cost mar-
ket value plus repair costs
Car dealer or car rental company Dealer Billing Price* (excl VAT) Cost (excl VAT) or if no cost mar-
ket value plus repair costs
Other Cost to employer (incl VAT) Cost to employer (incl VAT)
* The dealer billing price is the selling price determined by a manufacturer in respect of a motor vehicle that will be sold to
motor vehicle dealers and rental companies.
The above does not apply if the vehicle was obtained in terms of a lease agreement (instalment
credit agreement (finance lease or suspensive sale agreement)). In this instance the determined
value is the retail market value at the time the employer first obtained right of use or the cash value of
the vehicle. If the vehicle was obtained in terms of an operating lease, the determined value is the
actual cost incurred in terms of the operating lease and the cost of the fuel.
Value-added tax (VAT) and any maintenance plan purchased (including extended maintenance
plans) are included in the original cost. In the current economic environment, when acquiring a motor
vehicle from a dealership, a common selling point is the vehicle having a 3/5/6-year warranty and a
maintenance contract. The vehicle’s selling price would therefore have this maintenance contract
built in (although the invoice does not always specifically stipulate the details of this cost).
Points to consider when calculating the fringe benefit of an employer-provided vehicle:
• If the vehicle was subject to a maintenance plan at the time of acquisition by the employer, the
fringe benefit value is calculated at 3,25% of the determined value.
• If the vehicle was not subject to a maintenance plan at the time of acquisition by the employer,
the fringe benefit value is calculated at 3,5% of the determined value.
The reason why the rate is reduced when a maintenance plan is included in the purchase price, is
because the rate of 3,5% assumes that the on-going maintenance of the vehicle will be the responsi-
bility of the employer. Inclusion of the maintenance plan in the purchase price would thus result in a
double inclusion and therefore the rate is reduced to 3,25% to cater for this situation.
A maintenance plan is a contractual obligation undertaken by the seller of the vehicle to

underwrite/cover all costs of maintenance of the vehicle (other than costs related to top-
up fluids, tyres or abuse of the motor vehicle) provided the coverage lasts for at least
3 years or 60 000 km (whichever comes first).
EXAMPLE 6.4
Required:
Calculate the taxable benefit from the private use of the motor vehicle that needs to be included in Mary
Maxema’s gross income for the current year of assessment.
Information:
Mary has the free use of a motor vehicle that cost her employer (retail shop):
R
Retail market value 350 000
Her employer purchased the vehicle on 1 April 2017, and she received the use thereof on that date. No
maintenance plan was included in the cost of the vehicle. The employer is responsible for full maintenance of
the motor vehicle.
(continued)
Solution
As the motor vehicle was purchased after 1 March 2015 and the employer is not a manufacturer/importer nor
a car dealer/rental company, the determined value is the cost including VAT. The fringe benefit is calculated
as follows:
R350 000 × 3,5% × 11 months = R134 750
EXAMPLE 6.5
Required:
Information:
R
Retail market value 350 000 (includes a maintenance plan for 3 years or 60 000 km)
Her employer purchased the vehicle on 1 April 2017, and she received the use thereof on that date. The
employer is responsible for full maintenance of the motor vehicle.
Solution
as follows:
R350 000 × 3,25% × 11 months = R125 125
EXAMPLE 6.6
Required:
Information:
Mary has the free use of a motor vehicle that cost her employer (motor car dealer):
R
Retail market value 307 018 (a maintenance plan for 3 years or 60 000 km)
Her employer purchased the vehicle on 1 April 2017, and she received the use thereof on that date. The
employer is responsible for full maintenance of the motor vehicle.
Solution
As the motor vehicle was purchased after 1 March 2015 and the employer is a motor car dealer the deter-
mined value is the retail market value which is further defined as the dealer billing price excluding VAT. As the
retail market value figure is given in the question it is implied that it is the correct figure and that the special
rules have already been applied (i.e. the dealer billing price excluding VAT). Thus the fringe benefit is calcu-
lated as follows:
R307 018 × 3,25% × 11 months = R109 759

The carbon dioxide levy (automatically added to the cost of a vehicle by motor dealerships) will also
be included in the determined value when calculating the company car benefit, as legislation spe-
cifies that the original cost excludes any interest or finance charges (and by implication it includes all
other costs). In addition, the invoice does not generally show the levy separately, nor is it generally
depicted separately on the selling price of the vehicle.
If the employer-provided vehicle was acquired by the employer in terms of an operating lease, the
value of the private use will be the rental payments incurred by the employer under the operating
lease and the cost of the fuel in respect of that vehicle.
An operating lease is an agreement where the employer pays a monthly rental to the rental company
(lessor). The vehicle belongs to the lessor and all costs in respect of maintenance are paid by the
lessor.
The use of the 3,5% or 3,25% in the company car fringe benefit calculation assumes the following:
1. The vehicle is not used at all for business purposes, unless the taxpayer can prove otherwise;
and
2. The employer pays for ALL the operating expenses of the vehicle.
Should either or both of the above two assumptions not be true (i.e. that the employee actually uses
the company car for business purposes and/or pays for the operating costs of the vehicle), the
taxable fringe benefit amount included in the employee’s taxable income will, on assessment, be
reduced at the end of the tax year.
The reduction in the value of the fringe benefit is calculated as follows:
1. Across-the-board business use reduction
If the employee uses the company car for business purposes, on assessment a percentage,
calculated as the ratio of business travel in relation to total travel, will be deducted from the
fringe benefit value. This means that at the end of the year of assessment, he/she will calculate
the final taxable fringe benefit. This amount may differ from the employer’s monthly calculation.
The employee can only claim this deduction if the employee can prove his or her business kilo-
metre usage (i.e. the employee has to keep a logbook of the actual business kilometres travel-
led). This deduction is also available in the case where the vehicle was acquired in terms of an
operating lease.
Reduction = Fringe benefit value × business km/total km
EXAMPLE 6.7
Required:
Calculate the taxable benefit from the private use of the motor vehicle that will be included in Mary Maxema’s
gross income at the end of the current year of assessment.
Information:
R
Her employer purchased the vehicle on 1 April 2017, and she received the use thereof on that date. The cost
of the vehicle did not include any maintenance plan. The employer is responsible for full maintenance of the
motor vehicle. However, Mary did keep a logbook of her actual business kilometres travelled in the company
car (3 000 km). She travelled 12 000 km in total during the year in the company car.
(continued)
Solution
As the motor vehicle was purchased after 1 March 2015 and the employer is neither a manufacturer/importer
nor a car dealer/rental company, the determined value is the retail market value. The fringe benefit is calcu-
lated as follows:
R
Fringe benefit calculation (cash equivalent):
(R350 000 × 3,5% × 11 months) 134 750
Less: Business use (R134 750 × 3 000 km/12 000 km) (33 688)
Taxable income on assessment 101 062
If the employee is a judge or Constitutional Court judge, the kilometres that the judge travels
between his or her place of residence and the court over which the judge presides are deemed
to be kilometres travelled for business purposes (as mentioned above) and not for private pur-
poses.
2. Employee pays for ALL operating costs

SARS will reduce the fringe benefit (cash equivalent) by an additional amount to take into
account the private element of these costs (the business element has already been allowed by
virtue of the across-the-board reduction calculated above), if the employee pays in full for any of
the following expenses relating to the company car:
• insurance;
• licensing fees;
• maintenance costs; and
• fuel costs for private use.
This is because the amount on which the employee is being taxed (3,5% or 3,25%) is calculated
on the assumption that the car is used wholly for private purposes. This reduction does not apply
to a vehicle acquired by the employer under an operating lease. The reduction for the business
kilometres travelled will be deductible irrespective that the vehicle was purchased in terms of an
operating lease.
The fringe benefit will be reduced if the employee is paying for some of the private use (payment
of insurance, licensing fees, maintenance and/or fuel costs). The Commissioner only allows this
deduction at the end of the year of assessment in the employee’s income tax return.
Insurance, licensing fees and maintenance costs
(Actual insurance + licensing fees + maintenance costs paid by the employee) × private km/
total km.
Reduction = Cost (e.g. licence) × private km/total km
Fuel
In respect of the private fuel cost, the reduction is based on the rate per kilometre for fuel pub-
lished by the Minister of Finance for purposes of claims against travel allowances, multiplied by
total private kilometres driven.
Fuel cost for private purposes paid by employee × tariff per km (per travel allowance table –
Schedule B)
Reduction = Fuel tariff × private km
EXAMPLE 6.8
Required:
Maxema’s gross income at the end of the current year of assessment.
Information:
R
of the vehicle did not include any maintenance plan. Mary kept a logbook of her actual business kilometres
travelled in the company car (3 000 km). She travelled 12 000 km in total during the year in the company car.
In terms of her employment contract, Mary is solely responsible for all the maintenance costs of the vehicle.
These costs amounted to R3 500.
Solution
The fringe benefit is calculated as follows:

R
Fringe benefit (cash equivalent) calculation
(R350 000 × 3,5% × 11 months) 134 750
Less: Business use (R134 750 × 3 000 km/12 000 km) (33 688)
Taxable income before reduction for maintenance costs paid by employee 101 062
Less: Maintenance paid for private kilometres: R3 500 × 9 000 km*/12 000 km (2 625)
*9 000 km (private km) = 12 000 km (total km travelled) – 3 000 km (business km travelled)
EXAMPLE 6.9
Required:
Information:
R
of the vehicle did not include any maintenance plan. The employer is responsible for the full maintenance of
the motor vehicle, other than the private fuel cost, for which Mary is solely responsible in terms of her
employment contract.
Mary kept a logbook of her actual business kilometres travelled in the company car (3 000 km). She travelled
12 000 km in total during the year in the company car.
(continued)
Solution

R
Fringe benefit (cash equivalent) (R350 000 × 3,5% × 11 months) 134 750
Less: Business use: R134 750 × 3 000 km/12 000 km (33 688)
Taxable income before reduction for fuel 101 062
Less: Fuel paid for private kilometres (R1,27 × 9 000 km (Note) (11 430)
Note:
The amount of R1,27 reflects in the ‘Fuel cost’ column in the table contained in the latest notice promulgated
in the Government Gazette setting out the rate per kilometre for claims against travel allowances. The value of
the car, for the purposes of this table, is the cost of the vehicle including VAT, but excluding finance charges/
interest, i.e. R350 000.
Remember that the deduction for the operating costs (other than fuel) is calculated by
using the operating costs and multiplying it with the private kilometres divided by the total
kilometres travelled.
For the fuel deduction, one can only use the private kilometres in the deduction calcula-
tion (do not divide the private kilometres by the total kilometres travelled).
3. Employer partially reimburses employee for operating costs

If the employer partially reimburses the employee for the amounts paid for licensing fees, insur-
ance, maintenance costs or private cost of fuel, the employee may NOT deduct any private
expenses for the items reimbursed.
EXAMPLE 6.10
Required:
Information:
R
Cash cost 307 018
VAT 42 982
Finance charges 75 000
of the vehicle did not include any maintenance plan. The employer is responsible for the full maintenance of
the motor vehicle other than the private fuel cost, for which Mary is responsible.
However, Mary did keep a logbook of her actual business kilometres travelled in the company car (3 000 km).
She travelled 12 000 km in total during the year in the company car. Mary pays for all the fuel for private use
of the vehicle, but her employer did refund her an amount of R6 000.
(continued)
Solution
as follows:
Fringe benefit (cash equivalent) (R350 000 (R307 018 + 42 982) × 3,5% × 11 months) 134 750
Less: business use: R134 750 × 3 000 km/12 000 km (33 688)
Taxable income before reduction for fuel = 101 062
Less: fuel paid for private kilometres: R1,27 × 9 000 km (Note ) (nil)
The reimbursement by Mary’s employer results in the deduction for the private fuel paid by herself being
disallowed. This is due to Mary's out-of-pocket expense being Rnil.
4. Employees’ tax
Employees’ tax (refer to chapters 8 and 9) is required to be withheld from all fringe benefits on a
monthly basis. The employees’ tax in respect of the company car fringe benefit is dealt with in
chapter 8.
5. Travel allowance and company car

If an employee receives a travel allowance as well as a company car, SARS taxes the travel
allowance in full and allows no deduction for actual business kilometres travelled. Only the
deductions mentioned in points 1.3 above will be allowed against the company car fringe bene-
fit calculation.
A fringe benefit results in an amount being included in gross income. This is the general rule for
calculating this fringe benefit. Remember that where employees have to pay for the use of the vehicle
(not its operating expenses), they will be able to reduce the amount to be included in gross
income by the amount they paid. The operating expenses such as licensing fees, insurance, mainte-
nance costs and fuel paid by the employees can only be deducted upon assessment by the
Commissioner.
Sometimes an employer gives the employee a vehicle that has already been used by someone else.
In this case, it would not be fair on the employee to base his or her taxable benefit on the original
cost of the vehicle. The Seventh Schedule makes provision for a reduction of the determined value of
the vehicle in these cases.
In these cases, it is required that the determined value be reduced by 15% for each completed
12-month period from the date that the vehicle was purchased, until the date that the employee
received the right of use. The 12-month period does not refer to a year of assessment. The 15%
reduction is done on the reducing balance method. The following example is useful when explaining
the reducing balance method.
EXAMPLE 6.11
Required:
Calculate the taxable benefit from the private use of the motor vehicle that needs to be included in Tracy’s
gross income for the current year of assessment.
Information:
Tracy Racy was granted the free use of a motor vehicle for private purposes for the full tax year. The
employer (retail shop) purchased the motor vehicle (without a maintenance plan) 15 months earlier at a retail
market value of R280 000. Another employee has used the motor vehicle for the past 15 months.
(continued)
Solution
Determined value of vehicle:

Retail market value = R280 000
As another employee used the motor vehicle for 15 months, adjust the determined value by 15% for each full
year.
R
Cost 280 000
Less: Wear and tear: R280 000 × 15%
(only adjust once as only 1 completed 12-month period applies) (42 000)
Determined value 238 000
Taxable benefit:
= R238 000 × 3,5% × 12 months
= R99 960
If the vehicle was purchased 26 months ago, the determined value would be calculated, using
the reducing balance method, as follows:
R
Cost 280 000
Less: Wear and tear: R280 000 × 15% (42 000)
238 000
Less: Wear and tear: R238 000 × 15%
(as there are 2 completed 12-month periods) (35 700)
Determined value 202 300
The employee will not be taxed on a benefit where the vehicle that he or she uses is
available for, and is in fact used by employees of the employer in general, for example
the employee has cars available for use by all employees and it is referred to as a car-
pool scheme; or if the private use is incidental to the business use; or if the vehicle is not
kept near the residence of the employee when not used after hours. There will also be no
taxable benefit if the duties of the employee are such that he or she is regularly required
to use the vehicle after hours, and not allowed to use the vehicle for private purposes.
6.2.4 Meals, refreshments, or meal and refreshment vouchers

Where an employer provides an employee with any meal, refreshment, or voucher for a meal or
refreshments, either free of charge or for an amount that is less than the cost of such meal, refresh-
ment or voucher, the taxable value of the benefit is the cost of the meal to the employer less any
amount paid by the employee.
EXAMPLE 6.12
Required:
Calculate the taxable value of the fringe benefit discussed below.
Information:
An employer pays R30 a meal for his employees to eat at a restaurant close to where the employer’s business
is situated. The employees pay the employer R300 per month for 30 coupons (R10 per coupon), which entitle
the employees to 30 meals at the restaurant.
Solution
R
Cost to employer: (30 coupons × R30 each) 900
Less: cost to employee: (30 coupons × R10 each) (300)
Taxable fringe benefit 600
There is no taxable benefit where the meal is provided to employees in a cafeteria,

canteen or dining room on the business premises (used mainly by employees of the
employer), or to any meal or refreshments supplied during business hours or extended
working hours, or on special occasions.
Should the employee be required to entertain on behalf of the employer, the cost of the
meal or refreshment enjoyed by the employee in this regard will not be taxable as a fringe
benefit in the employee’s hands.
6.2.5 Residential accommodation

This fringe benefit arises where the employer provides the employee with a place in which to reside.
This place may have furniture supplied, it may have meals supplied, and it may also have water and
power supplied. In some cases, the employer pays all of the above expenses; in other cases, only
some of the above expenses; and in still other cases, only the accommodation and nothing else.
The employer will base the calculation of the taxable fringe benefit on what the Income Tax Act refers
to as the ‘rental value’ for the year, less any amount paid by the employee.
This fringe benefit should not be confused with the scenario where the employee purchases residen-
tial accommodation from the employer at less than market value (see 6.2.1).
The rule for calculating the taxable benefit depends on whether or not the employer
provides accommodation (not owned by it) to an employee in terms of an arm’s length
transaction, or whether the employee has an interest in the accommodation; meaning that
the calculation can be done in one of two ways. Remember: there is a different rule for
calculating the taxable benefit on holiday accommodation.
Rental value where the employer owns the accommodation

The employer will calculate the rental value by using the formula.
C D
(A – B) × ×
100 12
A = remuneration proxy, which is the employee’s remuneration, as defined in the Fourth Sched-
ule, and received in relation to the previous year of assessment (excluding residential
accommodation and use of a motor vehicle).
B = R75750, or Rnil if the employer is a private company and the employee controls the company
or the employee has the option to become the owner of the accommodation.
C = 17, unless the following applies: if the accommodation is a house, flat or apartment consisting
of at least four rooms and the accommodation is either furnished or power is supplied, it will
be 18; or if the accommodation is both furnished and power is supplied, it will be 19.
D = the number of months in the current year of assessment that the employee was entitled to
occupy the accommodation.
EXAMPLE 6.13
Required:
Calculate the taxable benefit from the residential accommodation that needs to be included in Koos Nel’s
gross income for the current year of assessment.
Information:
Koos has the free use of a house (owned by the company), which consists of 12 rooms. It costs the company
R2 950 per month to own it, and it could be let to a third party at R3 400 per month. Koos’ remuneration proxy
for the previous year of assessment was R248 000.
Koos pays the electricity and water account each month. A total of R1 560 was paid in this regard during the
current year of assessment. The house is made available to Koos unfurnished.
Solution
As Koos does not have any interest in the house, the following formula will be used to calculate the fringe
benefit:
C D
(A – B) × ×
100 12
= (R248 000 – R75 750) × 17/100 × 12/12

= R29 283 (which will be included in Koos’ gross income)
Note:
C = 17, because the house consists of 12 rooms, it is unfurnished and Koos pays the water and electricity
account.
The R1 560 paid by Koos for electricity and water is not used to reduce the fringe benefit because it is not
paid to the employer as compensation for the fringe benefit received.
Rental value where the employer does not own the accommodation
The rental value will be the formula value or if it is at arm’s length then it will be the lower of the formu-
las or the expenditure incurred.
Rental value where the employee has an interest in the accommodation

The employee has an interest in the accommodation in the following instances:
• if the accommodation provided by the employer is actually owned by the employee or a person
connected to the employee; or
• if any possible increase in the accommodation’s value accrues to the employee or a person
connected to the employee; or
• if the employee, or a person connected to the employee, has a right to purchase the accom-
modation.
Where the employee has an interest in the accommodation, the rental value will be the amount as per
the formula. However, when using the formula in this instance, the value of ‘B’ will be zero if the
employee or his or her spouse has:
• direct or indirect control over the company, which must be a private company, i.e. a (Pty) Ltd; or
• an option granted by the employer to become the owner of the residential accommodation.
EXAMPLE 6.14
Required:
Calculate the taxable benefit from the residential accommodation that needs to be included in Kelly’s gross
income for the current year of assessment.
Information:
Kelly Kumalo is a director and shareholder of a private company. Kelly has the free use of a house (rented by
the company), which consists of 12 rooms. It costs the company R2 950 per month to rent it, and it could be
let to a third party at R3 400 per month. Kelly’s remuneration proxy for the previous year of assessment was
R248 000. Kelly pays the electricity and water account each month. A total of R1 560 was paid in this regard
during the current year of assessment. The house is made available to Kelly unfurnished.
Solution
As Kelly is a shareholder of the company that is granting the accommodation (i.e. she has an interest in the
accommodation), the lower of the rental value or the formula will be included in her gross income:
Greater of
C D
Formula (A – B) × ×
100 12
= (R248 000 – R0*) × 17/100 × 12/12
= R42 160
Or
Rental value R2 950 × 12 = R35 400
Therefore, R34 500, will be included in Kelly’s gross income.

* As Kelly has a controlling interest (shareholder in a private company), the value of ‘B’ = zero.
If the actual rental value of the accommodation, by reason of the situation, nature or
condition of the accommodation, or any other factor, is lower than (a) the rental value
calculated by means of the formula, or (b) the holiday accommodation value, the Com-
missioner may only tax the lower amount upon deciding that it is fair and reasonable. An
employer can apply for a directive to determine the value relating to the residential
accommodation due to the situation of the accommodation (e.g. small remote town where
the accommodation is situated and limited accommodation available) or the nature and
condition of the accommodation (old deteriorated house). Details regarding the applica-
tion of such a directive can be found in the publication entitled ‘External Guide to deter-
mine fringe benefit value on accommodation’, which is available on the SARS website,
under ‘Publications’.
The following applies if an employer provides an employee with two or more residential units situated
at two different places, which the employee is entitled to occupy from time to time whilst performing
his or her duties. The value of the fringe benefit of both units will be the value of the unit with the
highest rental value over the full period during which the employee was entitled to occupy more than
one unit.
Holiday accommodation
Where an employer pays for holiday accommodation for an employee or one of his or her family
members, the employee has to include a taxable benefit in his or her gross income.
The calculation of the taxable benefit will depend on whether the employer rents or owns the
accommodation. Where it is rented, the taxable benefit will be the cost paid by the employer (includ-
ing meals, refreshments and services). In any other situation, SARS will tax the employee on an
amount equal to the normal rate per day at which the owner could let the accommodation to a per-
son who is not an employee.
As with all the other benefits, the employee can reduce the taxable benefit by any amount
that he or she has to pay to make use of the holiday or residential accommodation.
EXAMPLE 6.15
Required:
Calculate the taxable benefit from the holiday accommodation that needs to be included in Ben’s gross
income for the current year of assessment.
Information:
Ben Bosheilo is a director of a private company.
The private company owns a beach cottage on the South Coast. The beach cottage is let to non-employees
at a rate of R250 per person per day. Ben and his wife, Mona, invited another couple to join them at the
beach cottage for ten days during the current year of assessment.
Solution
Holiday accommodation = (10 days × 4 people × R250 a person a day) = R10 000.
Ben will have to include R10 000 in his gross income.
6.2.6 Free or cheap services

A taxable benefit arises where a service has been provided (at the expense of the employer), either
by the employer or another person, for the private benefit of an employee. The taxable benefit is the
cost of the service to the employer, less any amount paid by the employee.
The following services are not taxable:
• a transport service provided by the employer to carry employees between their homes and work;
• any recreational facilities at work to help employees perform their duties better;
• where the employer pays for the spouse or child of the employee to travel, and the employee is
stationed more than 250 km away from home for more than 183 days during the current year of
assessment; and
• any communication service provided to an employee if the service is used mainly for purposes of
the employer’s business, for example the subsidisation of, or provision by, the employer of tele-
phone line rentals or the subscription fees for internet access for the use of its employees.
6.2.7 Receiving low-interest debt

This benefit arises where employers, who are not money-lenders, lend money to their employees at
either no interest rate or a very low interest rate. The Minister of Finance sets an interest rate, that is,
the official interest rate, which acts as a measure. A taxable fringe benefit will arise where the interest
rate charged by the employer is less than the official interest rate.
The official interest rate changes from time to time, as it is specifically linked to the South African
repurchase (Repo) rate (i.e. the repurchase rate plus one per cent). The Minister of Finance will
automatically adjust the official rate at the beginning of the month following the month during which
the Reserve Bank changes the repurchase rate.
One will calculate the fringe benefit by multiplying the outstanding debt (e.g. loan amount) by the
difference between the official interest rate and the rate at which the employee is paying interest. A
reduction applies where the debt is for less than a full year.
This benefit will only apply where the value of the debt made by the employer to the employee is
more than R3 000 in total.
Where the debt is used in the production of a taxpayer’s income, the deemed interest
as calculated in terms of this fringe benefit is allowed to be deducted in terms of
section 11(a).
EXAMPLE 6.16
Required:
Calculate the taxable portion of the fringe benefit. Round off your answer to the nearest rand.
Information:
Kunye Kuhlanu borrowed R10 000 from his employer at an interest rate of 6% on 1 September of the current
tax year.
Assume, for this question, that the official interest rate is 7,75%%.
Solution
R
Value: R10 000 × 7,75% × 6/12 3 888
Less: Consideration paid by employee (R10 000 × 6% × 6/12) (300)
Taxable benefit 88
EXAMPLE 6.17
Required:
Calculate Lucas’ taxable income for the current year of assessment. Round off your answer to the nearest rand.
Information:
Lucas Thelani earned the following income during the current year of assessment:
R
Salary from Lorbrand CC 400 000
Rental income 24 000
Lorbrand CC made a loan of R250 000 to Lucas during the year of assessment ending on 28 February. They
granted the loan on 1 August at an interest rate of 4%. Lucas used the debt to buy a small rent-producing flat.
The official rate of interest is 7,75%.
Solution
R R
Salary 400 000
Low interest debt (loan amount) – taxable benefit 5 469
Value (R250 000 × 7,75% × 7/12 months) 11 302
Less: Consideration paid by employee (R250 000 × 4% × 7/12) (5 833)
Rental income 24 000
Gross income 429 469
Less: Allowable deductions

Section 11(a) interest paid in the production of rental income (refer to the Note
below) (11 302)
Taxable income 418 16790
Note:
Interest at the official rate may be deducted in terms of the Income Tax Act where the loan has been used in
the production of income; therefore, the actual interest paid (4%) as well as the taxable benefit (3,75%) can
be deducted.
6.2.8 Contributions to a medical fund

In some instances, the employer and the employee will split the payment of the total contribution
required by a medical fund (the percentage of the split will be in accordance with the employment
agreement and will differ from employer to employer). It is legal for an employer to assist an
employee in meeting this contribution. However, the Income Tax Act stipulates that the employer’s
contribution (no matter what the amount) will be a taxable fringe benefit. SARS calculates this fringe
benefit as any amount paid or contributed by the employer to any medical fund for the benefit of its
employee.
An employer’s contribution for an employee who is 65 years or older and who has not retired from
that employer will result in a fringe benefit for the employee. Where a taxpayer has retired from an
employer, by reason of superannuation, ill-health or other infirmity and the employer continues to pay
contributions on behalf of the retired taxpayer, the fringe benefit will be non-taxable.
EXAMPLE 6.18
Required:
Calculate the taxable fringe benefit.
Information:
Funa Royal (54 years old) works for Playhouse Productions Limited. Playhouse Productions Limited pays the
full medical contribution of R1 500 per month for the whole year. Funa and her husband are members of the
medical fund.
Solution
Fringe benefit included in gross income
R
Employer contributions (R1 500 × 12) 18 000
Taxable benefit 18 000
Note:
If Funa Royal was 65 years or older, the taxable value of the fringe benefit would still be R18 000 if she was in
the employ of Playhouse Productions Limited.
Figure 6.1 summarises the medical fringe benefit for income tax purposes:
Medical fringe benefit
Contributions paid by employer
< 65 > 65
Employee retired?
Fringe benefit =
employer’s
Yes: No:
contribution
No fringe Fringe benefit = em-
benefit ployer’s contribution
Figure 6.1: Medical fringe benefit
6.2.9 Costs relating to medical services

A fringe benefit arises where an employer pays an amount (other than a contribution or payment as
set out in paragraph 6.2.8) in respect of medical, dental and similar services, hospital services,
nursing services or medicines provided to an employee or his or her spouse, child, relative or de-
pendant.
The value of the fringe benefit is the total expenditure incurred. If the amount per employee cannot
be determined, the employer will calculate the value of the fringe benefit by dividing the total cost
(paid by the employer for all the employees) by the number of employees entitled to make use of the
services.
No fringe benefit will arise in the following cases:
• an employer providing treatment to an employee (spouse/children) where the treatment is listed
by the Minister of Health as prescribed minimum benefits in terms of a scheme or programme of
that employer, where the scheme or programme
i constitutes the carrying on of the business of a medical scheme (approved by the Registrar
as being exempt from complying with requirements of medical schemes in terms of the Act);
or
i does not constitute the carrying on of the business of a medical scheme if that employee,
including his or her spouse and/or children, is
– not a beneficiary of a medical scheme registered under the Medical Schemes Act 131 of
1998 (the MSA); or
– a beneficiary of a medical scheme, but the total cost of that treatment is recovered from
that medical scheme;
• an employer rendering services or supplying medicines to employees for purposes of complying
with any law of the Republic of South Africa;
• a person deriving benefits from an employer when that person is
i entitled to the 65 or over rebate;
i retired by reason of superannuation, ill-health or other infirmity;
i a dependant of an employee who died; or

i a dependant of an employee who died, but retired by reason of superannuation, ill-health or
other infirmity;
• an employer rendering services to employees in general, at their place of work, for the better
performance of their duties.
EXAMPLE 6.19
Required:
Calculate the taxable fringe benefit.
Information:
Justin Peril (28 years old) works for Models (Pty) Limited. Models (Pty) Limited operates a scheme whereby it
provides dental services (including teeth whitening) to its employees (models). Models (Pty) Ltd provides
these dental services to all its employees at the company’s premises, as this helps them perform their model-
ling duties better. Models (Pty) Ltd paid R2 500 for Justin’s teeth-whitening services during the year.
Solution
R
Payment of dental services 2 500
However, as the employer renders these dental services to the employees in general at their place of work for
the better performance of their duties, SARS places no value on this benefit.
R
Taxable benefit nil
6.2.10 Payment of employee’s debt or release of employee

from obligation to pay a debt
A taxable benefit arises where an employer pays a personal/private amount owing by the employee
without requiring the employee to reimburse the employer, or where the employer frees the employee
from repaying a loan granted by the employer. The taxable benefit will be any amount paid by the
employer, or the amount that the employee need not pay back to the employer. If membership of
a professional body is a condition of an employee’s employment, and the employer pays the
employee’s subscription to the body, a taxable benefit does not arise.
Certain organisations require their members to maintain indemnity insurance in respect of their pro-
fessions, and employers often pay these premiums on behalf of their employees. Under previous
legislation, these premiums – if paid by employers – were taxable benefits in the hands of the
employees. SARS has introduced an exemption in this regard: employers will not place any value on
the payment of indemnity insurance premiums, provided that the
• premium covers only claims arising from negligent acts or omissions by employees in the course
of their employment; and
• employees are either legally required to obtain this coverage as a legal pre-requisite for working
within the profession, or as a practical necessity.
This exemption does not include policies that cover the employee against more serious acts, such as
acts that result in criminal fines.
6.2.11 Benefits to relatives of employees and others

Where an employer gives any benefit to someone other than the employee because of the employ-
ee’s employment or the services that the employee rendered, the benefit will be included in
the employee’s gross income. There are certain exceptions to this rule, for example, cases where the
employer pays for the spouse or child of the employee to travel if the employee is stationed more
than 250 km away from home for more than 183 days during the current year of assessment.
A taxable benefit will also not arise if an employer (or associated institution) grants a scholarship or
bursary to a relative of an employee to enable or assist any such relative of an employee to study if
• the remuneration derived by the employee during the tax year did not exceed R600 000; and
• the bursary is less than R20 000 for a NQF level qualification of 1 to 4 (basic education till
Grade 12); or R60 000 for a NQF level 5 to 10 (higher education) during the tax year.
6.2.12 Employer-owned insurance policies

SARS will treat insurance policy premiums paid by employers as a taxable fringe benefit if the insur-
ance is for the direct or indirect benefit of employees (or their dependants/nominees). It will not be
treated as a fringe benefit if it relates to an event arising solely out of and in the course of employ-
ment of the employee.
Premiums paid by employers in respect of employer-provided disability income protection plans are
deductible by the employer, but give rise to a taxable fringe benefit for the employee. However,
SARS does not permit employees to deduct the premiums paid on their behalf (the fringe benefit
amount) against taxable income. Instead, if the insurance policy pays out, the employee will receive
an exemption for the lump-sum amount. He or she will therefore not be taxed on the amount paid out.
6.2.13 Employer contributions to retirement funds

From 1 March 2016, all contributions paid by an employer to a pension fund, provident fund or re-
tirement annuity fund for the benefit of any employee will be regarded as taxable fringe benefits.
When the employee calculates the deduction for contributions made, both the employer's contribu-
tion as well as the employee's contribution will be deductible (refer to chapter 3).
6.3 Allowances
An allowance is an amount of money that an employer gives an employee in order to incur business-
related expenses, but the employee is not obliged to prove or account to the employer for the ex-
penditure.
A taxpayer must include all allowances received from employment as part of his or her taxable in-
come. If the taxpayer used part or all of the allowance for business purposes, he or she may deduct
the expenses from the allowance received. However, where an employer reimburses an employee for
expenses actually incurred on the employer’s behalf, these amounts will not be included as part of
the employee’s taxable income. The following paragraphs contain a discussion concerning travel and
subsistence allowances.
6.3.1 Travel allowance

The Income Tax Act provides that any part of a travel allowance that an employee did not spend on
business travelling must be included in his or her income. Therefore, where employees received a
travel allowance, they will have to calculate how much their travelling for business purposes cost
them during the year of assessment.
In order to calculate the cost of business travelling, two facts are required:
• the portion of the total travelling allowance for the year that was used for business purposes;
• how much it cost the taxpayer per kilometre travelled.
Business kilometres
One should first look at the kilometres. Travelling can be only for one of two reasons: it is either for
private or for business purposes. In order to determine business kilometres travelled during the year
of assessment, the taxpayer must keep a logbook.
Logbook requirements
SARS is quite strict when taxpayers use actual business kilometres for travel allowance purposes,
requiring the logbook to contain the following:
• date of trip taken;
• start and end odometer readings for the day;
• destination travelled from and to;
• business and private kilometres, separately allocated.
SARS published an e-logbook on its website http://www.sars.gov.za/AllDocs/Documents/Logbook/
2017-18 SARS eLogbook.pdfeLogbook.pdf for the taxpayer’s convenience to ensure that taxpayers
keep all the necessary information. All taxpayers can download and use this e-logbook.
Figure 6.2: An example of two pages of an e-logbook

SARS considers travelling between home and work as private travelling; however, an
exception applies to judges and Constitutional Court judges – SARS allows them to
count their travelling between home and the court over which they preside as business
travelling.
EXAMPLE 6.20
Required:
Calculate the kilometres that Estcourt would use in each of the following situations when completing his
ITR12.
Information:
Estcourt Ford received a travel allowance from his employer towards the business use of his private motor
vehicle. Estcourt kept a detailed logbook of the kilometres that he travelled with the motor vehicle during the
The records reveal the following:
Part A
km
Total kilometres travelled 25 000
Business kilometres travelled 7 500
Part B
Private kilometres travelled 17 500
Solution
Part A
km
Business kilometres travelled (logbook kept) 7 500
Estcourt must use the actual business kilometres travelled (i.e. 7 500 km) when completing his ITR12.
Part B
km
Less: Private kilometres 17 500
Business kilometres travelled 17 500
Estcourt must use the actual business kilometres travelled (i.e. 17 500 km) when completing his ITR12.
Cost per kilometre

After determining the business kilometres, it is necessary to ascertain how much it cost the taxpayer
to run the vehicle for the year, as a portion of this cost will be the deduction for business travelling.
One can calculate the vehicle running costs in one of two ways:
Actual cost
The taxpayer can keep a record of the actual cost of running the vehicle for the year. Taxpayers who
choose this option must be able to prove all the expenditure that they want to claim. This implies not
only keeping proof of the business expenses, but a record of every vehicle expense. After adding up
all the expenses, one can calculate a cost per kilometre by dividing the total costs by the total kilo-
metres travelled for the year.
These costs include, among other things:

• fuel;
• licensing and insurance fees;
• maintenance costs;
• wear and tear. Where the taxpayer owns the vehicle, wear and tear is calculated by dividing the
cost price of the vehicle (including VAT) by seven years. This calculation is only for purposes of
the fringe benefit calculation to determine actual expenses. It will not be claimed as a deduction
to determine the individual’s taxable income. In this way, the taxpayer can deduct the cost price
of the vehicle as an expense against his or her travel allowance (the Income Tax Act stipulates
that where the cost price of the vehicle is more than R595 000, wear and tear must be calculated
on R595 000 only, and not the actual cost price);
• interest paid where the vehicle is financed (this interest is limited to an amount which would have
been incurred had the original debt been R595 000); and
• maintenance costs;
• lease payments where the taxpayer leases the vehicle.
Calculate the actual cost per kilometre by taking the total expenses and dividing it by the
total kilometres travelled for the year of assessment.
Deemed cost per kilometre

Where a taxpayer does not keep a record of all actual expenses, this could prove to be problematic
at the end of the tax year when trying to calculate a cost per kilometre. The Income Tax Act makes
provision for a deemed amount of expenditure by providing a table. The table provides three costs
that the user can read off, depending on the determined value of the vehicle. Note that the taxpayer
must still retain a logbook in order to reduce the value of the taxable travel allowance.
The determined value of the motor vehicle is the cash value including VAT, but excluding finance
charges. VAT is included because it is part of the cost price of the vehicle to an individual.
Table 6.3: Determined vehicle costs

Fixed cost Fuel cost Maintenance
Where the value of the vehicle — cost
R c c
does not exceed R85 000 28 492 91,2 32,9
exceeds R85 000, but does not exceed R170 000 50 924 101,8 41,2
exceeds R595 000 154 879 150,9 84,9
Three types of cost are provided for, i.e. fixed cost, fuel cost and maintenance cost. The fixed cost is
presented as a rand value, while the fuel and maintenance costs are converted to cents per kilome-
tre. This means that mathematically one cannot just add the three together! Also, the taxpayer may
only add a particular column if he or she had in fact paid for that expense. For example, if the em-
ployer paid for all the fuel costs, then the taxpayer may not add the fuel cost column in his or her own
calculations.
Apply the table as per the following example:
EXAMPLE 6.21
Required:
Calculate the deemed cost per kilometre (in rand) that Sally will be able to claim.
Information:
Sally Simple received a travel allowance for the full year of assessment. She travelled 34 000 km in total for
the year. Her vehicle cost her R100 000 excluding VAT. She kept no records of her vehicle expenses, but she
did maintain a logbook.
Solution
A determined value for the vehicle is required before one can even start using the table. This determined
value is the cost price of the vehicle including VAT. Sally’s vehicle cost R100 000 excluding VAT, therefore
VAT should be added to the cost: R100 000 + 14% = R114 000.
Now refer to the table, which indicates that R114 000 falls between R85 000 and R170 000. In this line, one
can read off the following values:
Fixed cost R50 924
Fuel cost 101,8 cents per kilometre
Maintenance cost 41,2 cents per kilometre
In order to add these amounts together, first convert the fixed cost to cents per kilometre. Do this by dividing
the fixed cost by the total kilometres driven for the year of assessment.
R50 924 ÷ 34 000 km = R1,498 per kilometre, which then needs to be converted to cents. As there are
100 cents in a rand, multiply by 100.
R1,498 per kilometre × 100 cents = 149,8 cents per kilometre.
Now add together all the costs: 149,8 +101,8 +41,2 = 292,8 cents per kilometre.
Now one can convert this amount back into rand, so that it can be used in the travel allowance calculation:
292,8 ÷ 100 = R2,93 per kilometre.
Once the taxpayer has calculated both the deemed cost per kilometre and the actual
cost per kilometre, he or she will choose the one that gives the greater cost per kilometre.
Where no records of actual expenses were kept, the taxpayer will have to use the
deemed cost per kilometre.
After calculating both the business kilometres and the cost per kilometre, it is possible to find out how
much the business travelling cost the taxpayer for the year by multiplying the two together.
Remember, the Income Tax Act stipulates that whatever part of the travel allowance was not used for
business travelling must be added to the taxpayer’s income. Therefore, the travel allowance less the
cost of business travelling will be included in income. If the cost of business travelling is more than
the travel allowance, no amount will be included in income (not even a negative amount). Where this
happens, it would be good to advise the taxpayer to request that the employer increase (if possible)
his or her travel allowance for the following year of assessment. The employer may not increase the
travel allowance for the year of assessment that has passed.
If a taxpayer can prove (with a logbook) that he or she travelled up to 12 000 km for
business purposes during a year of assessment, and he or she does not receive any
other allowance or reimbursements, the taxpayer may choose to deduct 355c per kilo-
metre from the allowance, instead of using the tables or actual expenses.
EXAMPLE 6.22
Required:
Calculate the taxable portion of the travel allowance.
Information:
Gina Galetti used her motor vehicle for a full year for business and private purposes. The cost price of the
motor vehicle was R600 000 (including VAT). Gina’s employer paid her a travel allowance of R9 200 per
month. Gina kept a logbook according to SARS requirements. In the current year of assessment, Gina travel-
led 35 400 km in total. According to her logbook, she travelled 10 200 km for private purposes.
Gina also kept an accurate record of her actual expenses, which were as follows:
R
Finance charges (refer to the Note below) 56 080
Fuel 28 000
Insurance premiums and licence fees 9 600
Maintenance 3 250
Note:
Gina purchased the vehicle at the beginning of the current year of assessment and Bankwest financed the full
purchase price. The finance charges for a vehicle with a cost price of R595 000 would have been R55 000 for
Solution
R
Travel allowance received (R9 200 × 12) 110 400
Less: Business travel expenses (calculated below) (169 672)
Taxable portion of allowance nil
Remember, one can never deduct more than the allowance received!
Calculation of business travel expenses:

Value of motor vehicle = R600 000
c/km
R154 879 100
Fixed cost per kilometre × 437,5
35 400 km 1
Fuel cost 150,9
Maintenance cost per kilometre 84,9
673,3
(continued)
Actual cost per kilometre

R
Depreciation (limited to R595 000 over 7 years) 85 000
Finance charges (limited to a vehicle with a cost price of R595 000) 55 000
Fuel 28 000
Insurance premiums and licensing fees 9 600
Maintenance 3 250
Total vehicle expenses 180 850
c/km
R180 850 100
Cost per kilometre × 510,9
35 400 km 1
Deemed cost per kilometre will therefore be selected, as this is 673,3c/km whereas the actual cost is only
510,9c/km.
Actual kilometres
Km
Total kilometres 35 400
Less: Actual private kilometres 10 200
Actual business kilometres 25 200
Business expense
= 25 200 km × (673,3c/km ÷ 100)
= R169 672
EXAMPLE 6.23
Required:
Information:
Rory Ramanyeni used his motor vehicle, which cost R82 000 (including VAT), for business purposes. He kept
a logbook, which indicates that he travelled 8 250 business kilometres for the current year of assessment. He
received a travel allowance of R20 000.
Solution
R
Travel allowance received 20 000
Less: Business travel expenses 86 250 km × R3,55) (29 288)
Note: Rory travelled less than 12 000 kilometres and may use the fixed rate per business kilometre instead of
the deemed rates per the table.
Travel allowance received for less than a year

Where a taxpayer receives a travel allowance for less than 12 months during the year of assessment,
this will have an effect on a number of the calculations.
J Actual kilometres
Taxpayers need to record the total kilometres driven for the period for which they received the
allowance, and not the total kilometres driven for the full year of assessment. They will use the
total kilometres driven for the period when calculating the actual and deemed cost per kilometre.
J Actual cost per kilometre

The taxpayer must keep record of all expenses only applicable to the period for which he or she
received the allowance. Wear and tear will be calculated by dividing the cost by 7 years, but then
one will need to calculate the pro rata of that amount by dividing it by 12 months, and multiplying
the result by the number of months that the taxpayer received the travel allowance during the
year.
J Deemed cost per kilometre

The fixed cost, as indicated in the table, represents a fixed cost for the year. When an employee
receives a travel allowance for less than the year, the fixed cost must represent the fixed cost for
a shorter period; therefore, one should reduce the fixed cost. One calculates this reduction by di-
viding the fixed cost by 365 days (or 366 in respect of a leap year such as 2016), and then multi-
plying the result by the number of days for which the taxpayer received an allowance during the
EXAMPLE 6.24
Required:
Information:
Simon Siyay used his motor vehicle from 1 June 2017 until the end of the current year of assessment (i.e.
9 months) for business and private purposes. The cost price of the motor vehicle was R375 000 (including
VAT).
Simon’s employer paid him a travel allowance of R10 200 per month for the nine months. Simon kept a log-
book in line with SARS requirements. Simon travelled 26 550 km in total in the nine months.
According to his logbook, he travelled 7 650 km for private purposes.
Solution
R
Less: Business travel expenses (calculated below) (95 313)
Calculation of business travel expenses:

Value of motor vehicle = R375 000
c/km
R113 179 273 100

Fixed cost per kilometre × × 318,8
26 550 km 365 1
Fuel cost per kilometre 127,2

Maintenance cost per kilometre 58,2
Deemed cost per kilometre 504,2
(continued)
The number of days is calculated as follows:

June 30
July 31
August 31
September 30
October 31
November 30
December 31
January 31
February 28
273
Actual kilometres
km
Total kilometres 26 550
Less: Actual private kilometres 7 650
Actual business kilometres 18 900
Business expense
= 18 900 km × (504,2c/km ÷ 100)
= R95 294
Company car and travel allowance

Where the employee receives the travel allowance in respect of a company car, SARS will tax the
travel allowance in full without any reduction for business travel. There will be two fringe benefit
calculations, one for the use of the company car and one for the travel allowance (without any reduc-
tion).
6.3.2 Subsistence allowance

A subsistence allowance is an allowance given to employees when their employer requires them to
be away from their home in the Republic for at least one night for business purposes. Most employers
will pay providers directly for accommodation and travelling, so the allowance is normally given to
employees to cover their meals and other incidental expenses, such as laundry, parking, room ser-
vice and gratuities.
A subsistence allowance paid to an employee will be taxable to the extent that the employee did not
spend it for business purposes while he or she was away from home for at least one night. This
means that the employee will have to deduct the cost of being away from the allowance and that
SARS will tax any left-over amount, as the employee did not spend it on business expenses.
An employee can either deduct actual costs (in which case he or she must prove the expenses), or a
deemed cost of R122 per day for incidental costs only, or R397 per day for meals plus incidental
costs while away on business in the Republic. Note that the deemed allowance is calculated per day
(not per night) spent away from home for business purposes.
Taxable subsistence allowance = Total allowance received . costs
The employee may choose the higher of deemed and actual costs. Note, however, that if the above
calculation results in a negative amount, the final answer is limited to Rnil.
EXAMPLE 6.25
Required:
Calculate the taxable portion of the subsistence allowance.
Information:
Sue Siyabonga spent four nights away from home for business purposes. Her employer paid her a subsist-
ence allowance of R1700. Sue Siyabonga can prove that she spent R1 100 on meals and incidental costs.
Solution
R
Subsistence allowance received 1 700
Less: Business expense (refer to note) (1 588)
Taxable portion of allowance 112
Note:
The deemed cost is R1 588 (R397 × 4), while the actual cost is R900.
Therefore, Sue will select deemed cost (R1 588), as this is greater than the actual cost, which is only R1
100.
Should the employee be required to travel outside South Africa for business purposes, the deductible
amount allowed against the allowance for meals and incidental costs will depend on the country
visited. Should the country the employee will be visiting not appear on the table (refer to Schedule E
at the end of this book or to the table available on the SARS website), the deemed deduction is
US$215.
6.4 Summary
The following structure is useful when calculating taxable income:
Gross income
Add: Fringe benefits

• Acquisition of an asset at less than actual value
• Right of use of any asset (other than residential accommodation and a motor vehicle)
• Right of use of motor vehicle
• Meals, refreshments and meal and refreshment vouchers
• Residential accommodation
• Free or cheap services
• Benefits in respect of interest on loans
• Contributions to a medical fund
• Contributions to a retirement fund
• Costs relating to medical services
• Payment of employee’s debt or release of employee from obligation to pay a debt
• Benefits granted to relatives of employees and others
L i i id b l
Add: Taxable portion of allowances

• Travel allowance
• Subsistence allowance
Less: Exempt income

• SA dividends – all exempt (either under section 10 or section 12T (Tax-free Investment
Account))
• Foreign dividends in terms of section 10B
• SA qualifying interest up to balance of R23 800 or R34 500 exempt (or fully exempt under
section 12T if from a Tax-Free Investment Account)
• UIF payments
Equals: Income
Income

i R350 000; or
i 27,5% × the higher of remuneration or taxable income before this deduction
i Taxable income before this deduction and CGT gain.
• Donations to public benefit organisations

QUESTION 1
Required:
Calculate Solly Polly’s taxable income for the 2018 year of assessment. Ignore capital gains tax.
Information:
Solly Polly is 32 years old, unmarried and employed by Dolly’s Trolleys Limited in Pofadder. The company
manufactures shopping trolleys. Solly has been employed by Dolly’s Trolleys Limited for the past ten years
and he earns a salary of R17 400 per month.
Other receipts
Dividends received
Solly received the following dividends during the 2018 year of assessment:
R
Dividend from South African public company 2 000
Dividend from South African private company 1 800
Dividend from United Kingdom public company (taxable portion) 2 400
Dividend from South American public company (taxable portion) 1 700
Interest received
Solly received the following interest during the 2018 year of assessment:
Interest on fixed deposit at a registered bank in South Africa (not a tax-free investment account) 13 100
Sale of stamp collection

Solly sold his stamp collection, which he bought for R1 300, for R2 600.
Cash prize
Solly was a contestant on the ‘Who wants to be a millionaire?’ game show.
He won R16 000.
(continued)
Rent
Solly owns a house in Kuruman, which he leases to Folly Fielander for R1 800 per month. Folly Fielander has
been renting the house for the past two years.
Solly incurred the following expenses during the 2018 year of assessment in respect of the house:
R
Rates and taxes 8 000
Repairs to roof and windows due to hail damage 2 000
Costs incurred to erect Para fencing around the house to improve the market value 4 000
Replacement of faulty geyser 4 500
Painting costs 2 500
Solly also received the following fringe benefits from Dolly’s Trolleys Limited during the 2018 year of assess-
ment:
Travel allowance
Solly received a travel allowance of R3 000 per month for the whole year. His motor vehicle cost R170 000
(excluding VAT) and he did not keep accurate records of his actual vehicle costs. He travelled 30 000 kilo-
metres in total during the current year of assessment and his logbook indicates that he travelled 18 000 pri-
vate kilometres. The travel allowance was not in respect of the company car he received from his employer
(see below). Solly paid for all of the running costs of this vehicle.
Use of a company car

The managing director of Dolly’s Trolleys Limited, Ms Dolly Volley, decided that Solly’s own motor vehicle was
not equipped to pick up trolleys that needed repairs, and gave him the use of a brand new Wagenvolks
kombi for the whole year. The retail market value of the motor vehicle amounted to R120 000 including a
maintenance plan. Dolley’s Trolleys Limited paid for all the running costs of the vehicle.
Low-interest debt
On 1 October 2017, Solly’s employer granted him a loan of R12 000 to do maintenance on his residence.
Solly paid interest at a rate of 5% a year on the loan (assume that the official interest rate remained constant
at 7,75%).
Housing benefits
Solly’s employer allocated the private use of a house (owned by the employer), consisting of at least six
rooms, to him for the whole year. The house is furnished, and Solly is responsible for the water and electricity
account and for maintaining the house. His remuneration proxy is R200 000.
Holiday accommodation
During the April 2017 holidays, Solly and his wife, Bokkie, spent five days at the coast in a furnished flat that is
owned by Dolly’s Trolleys Limited. Dolly’s Trolleys Limited usually rents the flat out at a cost of R275 per per-
son per day.
Pension fund contributions

Solly is a member of his employer’s pension fund and contributes R1 200 per month to the fund. The employ-
er does not contribute towards the pension fund. Remuneration total to be used for purposes of the calcula-
tion of allowable retirement fund contributions amounts to R335 525.
Donation
On 1 January 2018, Solly donated R2 000 to the University of the Western Cape. The university issued a sec-
tion 18A certificate.
Medical aid
Solly is a member of his employer’s medical aid fund. According to the rules of this fund, the employer makes
a contribution of R1 550 per month for Solly and his wife. Solly is obliged to make a contribution of R400 per
month. The medical aid fund paid most of the medical expenditure incurred by Solly, but he had to pay
R5 345 of the total medical expenses of R58 921 in respect of qualifying medical expenses.
QUESTION 2
Required:
Calculate which option is the best for Blanc Fortenel.
Information:
Blanc Fortenel is an employee of Nederburg Blanc Limited. His employer gave him the choice of either the
free use of a company car or a travel allowance in respect of the whole of the 2018 year of assessment.
Company car: The car had a retail market value of R150 000, but the price did not include a maintenance
plan. Nederburg Blanc Limited will pay all the expenses of running the car for both business and private
purposes.
Travel allowance: The travel allowance will amount to R7 400 per month for the use of his own car. Neder-
burg Blanc Limited will give Blanc Fortenel an interest-free loan of R171 000 to buy his own car.
The annual expenses to be incurred by Blanc in running the car, should he choose the car allowance option
and purchase a vehicle at a cost of R171 000 (VAT included), have been estimated as follows:
R
Fuel cost 17 000
Insurance 7 800
Maintenance (including services, oil, tyres) 2 400
Licence 150
27 350
Blanc Fortenel is a sales representative for Nederburg Blanc Limited. He will travel 65 000 km during the year
of assessment, of which 12 000 km will be for private use. Blanc Fortenel will keep a detailed logbook of all
these kilometres and will keep proof of all his expenses.
Blanc will not repay any portion of the interest-free debt. The official rate of interest will be 7,75% throughout
the relevant period.
Answers
CHAPTER
7 Capital Transfer Taxes

Author: L Steenkamp (updated E Hamel)
Contents
Page
7.1 Introduction ........................................................................................................................... 154
7.2 Capital gains tax ................................................................................................................... 154
7.2.1 Asset ......................................................................................................................... 155
7.2.2 Disposal .................................................................................................................... 156
7.2.3 Calculating a capital gain or loss in respect of an asset ......................................... 157
7.2.4 Aggregate capital gains or losses ............................................................................ 157
7.2.5 Proceeds ................................................................................................................... 158
7.2.6 Base cost .................................................................................................................. 159
7.2.7 Exclusions ................................................................................................................. 168
7.2.8 Limitation of capital losses........................................................................................ 171
7.2.9 General ..................................................................................................................... 172
7.3 Donations tax ........................................................................................................................ 172
7.3.1 Value of the donation ................................................................................................ 172
7.3.2 Exemptions ............................................................................................................... 172
7.3.3 Calculation of donations tax ..................................................................................... 173
7.3.4 Donations tax and capital gains tax ......................................................................... 176
7.4 Estate duty ............................................................................................................................ 177
7.4.1 Property and deemed property ................................................................................ 186
7.4.2 Valuation of property................................................................................................. 187
7.4.3 Deductions ................................................................................................................ 187
7.4.4 General abatement of R3 500 000 ........................................................................... 189
7.4.5 Death and capital gains tax ...................................................................................... 189
7.5 Summary ............................................................................................................................... 191
153

9 identify when capital gains tax is applicable.
9 calculate the taxable portion of a capital gain.
9 identify transactions on which donations tax will apply.
9 calculate donations tax on applicable transactions.
9 calculate estate duty on the estate of a person.
7.1 Introduction
The previous chapters mentioned the effect of income tax on an individual who earns a salary,
investment income and income from personal pursuits. This chapter concentrates on the effect of
capital gains tax, donations tax and estate duty on an individual.
Capital gains tax, donations tax and estate duty are collectively referred to as capital transfer taxes,
as they come into effect when capital assets pass (are transferred) from one person to another via
selling (capital gains tax), donating (donations tax), or the death of a person (estate duty).

J Capital gains tax J Estate duty
J Exclusions J Property
J Limitation of capital losses J Deemed property
J Donations tax J Deductions
J Value of the donation J General abatement
J Exemptions
7.2 Capital gains tax

As stated in chapter 2, capital gains tax is not a completely separate tax; it forms part of the normal
tax calculation. The South African Revenue Service SARS) introduced capital gains tax (CGT) to the
South African tax system on 1 October 2001. Prior to the introduction of CGT, receipts of a capital
nature (apart from the specific inclusions discussed in chapter 4) were not subject to tax, as the
definition of ‘gross income’ specifically excluded such receipts. Since 1 October 2001, receipts of a
capital nature are subject to tax in the form of CGT.
Section 26A of the Income Tax Act 58 of 1962 (as amended) (the Income Tax Act) refers to the rules
contained in the Eighth Schedule of the Act for determining a taxable capital gain or loss. Following
the calculation of a taxable capital gain or loss according to the specific rules, a gain will be included
in the taxable income calculation and SARS will carry any capital loss forward to the following year of
assessment where it can be set-off against any capital gain made in that year. The net taxable capital
gain (that is, all capital gains less any all capital losses made during the year) will be included in the
taxable income calculation before the deduction of donations to public benefit organisations.
The taxpayer cannot use capital losses to reduce taxable income. SARS will carry the net
capital loss forward to the following year of assessment, and the taxpayer can use this to
reduce any capital gains made during that year.
Chapter 7: Capital Transfer Taxes 155
Table 7.1: The framework for calculating the normal tax of a natural person
R
loss (section 20)
South African residents are taxed on realised capital gains on any asset held anywhere in the world,
while non-residents are taxed only on the disposal of two types of assets, namely:
• fixed property situated in South Africa; and
• movable assets that form part of a so-called ‘permanent establishment’ (e.g. a fixed place of
business) in South Africa.
Capital gains tax has four building blocks; i.e. asset, disposal, proceeds and base cost. This chapter
will examine each of these building blocks. The disposal of an asset will trigger capital gains tax. The
Eighth Schedule defines the words ‘asset’ and ‘disposal’, as taxpayers need to know what the Act
means by these words.
Table 7.2: The framework for calculating the taxable capital gain (or capital loss) of a natural person
R
Capital gains from disposal of assets (each disposal calculated separately) xxxx
Less: Capital losses from disposal of assets (each disposal calculated separately) (xxx)
Equals: Sum of capital gains/(capital losses) xxx
Less: Annual exclusion (40 000)
Equals: Aggregate capital gain/(aggregate capital loss) xxx
Less: Assessed capital loss from previous year (xxx)
Equals: Net capital gain* xxx
Inclusion rate 40%
Equals: Taxable capital gain xx
* If this is a net capital loss, Rnil is included in the taxpayer’s taxable income. Instead, the net capital loss
will be carried forward to the following year of assessment.
7.2.1 Asset
The Act defines an asset as property of any nature, being movable or immovable –
including:
• tangible or intangible assets;
• rights or interests in any property; and
• gold or platinum coins
but excluding:
• currency (money).
Based on the above, it is clear that the definition of an asset is very wide and that it includes all
assets that have a monetary value. Taxpayers would find it difficult to argue that whatever they have
disposed of falls outside of this definition.
It is clear that the definition of an asset is not limited to ‘capital’ assets. However, the Act
does provide that the taxpayer cannot take an amount that has been included in ‘gross
income’ into account for capital gains tax purposes. The same applies where the tax
payer wants to treat an expense as a deduction for income tax purposes – the Act will not
allow the expense to form part of the cost of an asset when calculating the capital gain.
7.2.2 Disposal
The definition of disposal is also extremely wide. To test if there was a disposal, ask whether a per-
son had an asset at the beginning of the year of assessment, but no longer has it at the end of the
year of assessment. If the answer is yes, it implies a disposal. There are two types of disposals which
trigger CGT, i.e. actual and deemed disposals.
Actual disposals
An actual disposal occurs when ownership of the asset is transferred to someone else, for example
by way of a sale or donation.
Deemed disposals
A deemed disposal occurs when a specified event takes place, but the taxpayer remains the owner
of the asset. Specific events which result in deemed disposals include emigration, debt reduction,
donations and death.
Due to the wide definition, legislation had to indicate specifically which events SARS would not con-
sider as disposals. The following non-disposal events are particularly applicable to individuals:
• where a person transfers an asset as security for a debt; and
• where a person/institution returns that asset to the owner, after settling the debt.
Figure 7.1 illustrates the different tax consequences, depending on whether an individual disposes of
an income asset (e.g. trading stock) or a capital asset (e.g. shares held as an investment).
When an income asset is disposed of, the amount received will be considered to be gross income,
but when a capital asset is disposed of, the amount will be subject to capital gains tax.
Disposal
Gross income Capital gains tax
100% net gain 40% net gain

included included
Figure 7.1: Disposal triggers either a gross income or a CGT event

EXAMPLE 7.1
Required:
Consider whether the following transactions will be treated as disposals for capital gains tax purposes.
Information:
John applied for a loan from BNF bank to purchase a machine to start a small business. The bank insisted
that he cede his vehicle in order to secure the loan. The bank cancelled the cession on the vehicle when John
repaid the loan in full.
Solution
The bank became the temporary legal owner of the vehicle when John ceded the vehicle to the bank, but
SARS will not treat this as a disposal for capital gains tax purposes. The same is applicable to the bank can-
celling the vehicle cession – SARS will not regard the return of ownership of the vehicle to John as a disposal
in the hands of the bank for capital gains tax purposes.
7.2.3 Calculating a capital gain or loss in respect of an asset

When a taxpayer disposes of an asset, it implies the calculation of a capital gain or loss. A SEPA-
RATE capital gain or loss calculation is required for EACH asset that the taxpayer disposed of during
a year of assessment. The following calculation is used, for each and every asset disposed of:
Proceeds
Less: Base cost
Equals: Capital gain or (capital loss)
From the above, it is evident that
• a capital gain will arise if the proceeds are more than the base cost; and
• a capital loss will arise where the proceeds are less than the base cost.
7.2.4 Aggregate capital gains or losses

After calculating the capital gain or loss for each of the assets that a taxpayer disposed of during the
year of assessment, one will add all the gains together, and use all the losses to reduce the gains.
Where the result of this calculation is a positive answer, SARS refers to it as the sum of capital gains.
Where the answer is negative, it is the sum of capital losses.
Capital gain on disposal of asset 1
Add: Capital gain on disposal of asset 2
Less: Capital loss on disposal of asset 3
Equals: Sum of capital gains / (capital losses)
Every taxpayer who is a natural person is entitled to an annual exclusion for CGT purposes. The
annual exclusion for the 2018 year of assessment is R40 000. This means that SARS allows the
deduction of the annual exclusion from the sum of capital gains or losses. This answer is then re-
ferred to as the aggregate capital gain (or loss). The exclusion also applies to the sum of capital
losses. SARS will carry the aggregate capital loss forward to the following year of assessment, but
will first reduce the loss by the annual exclusion before carrying it over.
The annual exclusion of R40 000 reduces both a capital gain as well as a capital loss. It
cannot, however, change a gain into a loss or the other way around – it can merely
reduce the sum of capital gains/(capital losses) to Rnil.
EXAMPLE 7.2
Required:
Calculate the amount that Suzzie will carry forward as a loss.
Information:
Suzzie sold three assets during the year. The result was a sum of capital losses of R45 000.
Solution
She is entitled to carry the loss forward to the following year of assessment, but she must first reduce the loss
by the annual exclusion. This means that a reduced loss of R5 000 (R45 000 – R40 000) will be carried for-
ward to the following year of assessment.
Figure 7.2 provides an overview of how capital gains tax affects an individual taxpayer.
Asset 1 Asset 2 Asset 3

Proceeds – base cost Proceeds – base cost Proceeds – base cost
= capital gain/loss = capital gain/loss = capital gain/loss
Add together to get sum of all capital gains / (capital losses)
Sum of capital gains Sum of capital losses

• Reduce by R40 000 • Reduce by R40 000
• Reduce by any loss brought forward • Increase by any loss brought forward
from previous year from previous year
Net capital gain Net capital loss

• × 40% • Carry forward to following year of
• Include in taxable income assessment
(section 26A)
Figure 7.2: An overview of how capital gains tax affects an individual taxpayer
Note that a natural person receives a R40 000 annual exclusion and the net gain is then
included in taxable income at a 40% inclusion rate. In relation to the taxable income
calculation, a taxable capital gain will be included after the deduction for contributions to
any retirement fund/s, and before any donations to public benefit organisations.
The following paragraph examines the calculation that is applicable in respect of each asset that is
disposed of during the year.
7.2.5 Proceeds
For each asset that is disposed of, the following calculation is required:
Proceeds
Less: Base cost
Equals: Capital gain or loss
Proceeds are the amounts received by or accrued to the taxpayer who disposed of the asset (i.e. the
selling price of the asset). No allowable adjustments to proceeds exist in terms of any costs. The only
amounts that the taxpayer can use to reduce proceeds are the following (this is not a complete list as
it includes only the amounts that are applicable to individuals):
• any amount that must be or has been included in gross income, for example a recoupment; and
• any amount that is repayable to the person who purchased the asset.
EXAMPLE 7.3
Required:
From the information below, determine the proceeds that the different taxpayers will be using for each asset
for capital gains tax purposes.
Information:
The taxpayers in the following examples sold assets during the year of assessment.
(a) Sally sold her house for R450 000, but before receiving her money, her estate agent withheld R45 000 in
respect of commission and R100 000 to pay over to the bank in respect of Sally’s outstanding bond.
(b) ABC manufacturers sold a machine for R150 000. It originally cost R100 000 and SARS permitted allow-
ances of R90 000 against the machine for income tax purposes. The R90 000 will be included in income
as a recoupment for income tax purposes.
(c) Jack sold his holiday home to his brother, John. He received R500 000 cash in respect of the sale. In a
separate agreement, Jack agreed to repay John an amount of R200 000 in respect of the sale once the
transaction was finalised.
Solution
(a) The proceeds will be R450 000, i.e. the amount Sally received for her house.
Note: the R45 000 commission fee may be added to the base cost of Sally’s house (see below).
(b) Reduce the proceeds by any amount that will be included in ‘gross income’. In this situation, the recoup-
ment of previous allowances = R90 000, therefore, the proceeds will be R150 000 – R90 000 = R60 000.
(c) Reduce the proceeds by any amount that is repayable to the person who purchased the asset. In this
situation, the proceeds will be R500 000 – R200 000 = R300 000.
7.2.6 Base cost

The base cost of an asset will depend on the purchase date of the asset. The base cost of assets
purchased before 1 October 2001 requires an adjustment, because the purchase date is before
capital gains tax became law. The base cost of assets purchased on/after 1 October 2001 does not
require any adjustment. For both categories of assets, base cost will include all the costs of purchas-
ing the asset, plus the costs of improving the asset, and any costs incurred in selling the asset. The
following are some of the costs that will be included in the base cost of an asset in terms of para-
graph 20 of the Eighth Schedule:
• actual cost of purchase;
• moving costs;
• any cost of improvement;
• cost of having the asset valued for CGT purposes;
• sales commission paid on sale of asset;
• advertising costs for the sale of the asset; and
• accounting and legal costs on sale of the asset.
Costs specifically excluded from the base cost are:

• repairs and maintenance;
• any costs or expenses that have been deducted for normal tax purposes (e.g. capital allowances);
• rates and taxes;
• security and insurance fees; and
• interest or borrowing costs.
Note: Even though an item may appear on the list of expenses to be included in the base
cost, it may not be added to the base cost if the taxpayer has already claimed it as a tax
deduction for normal tax purposes. SARS applies this measure to prevent double
deductions.
As stated above, depending on the date that the taxpayer purchased the asset, the base cost might
require an adjustment.
Assets purchased on or after 1 October 2001

The taxpayer purchased these assets after the introduction of capital gains tax; therefore, all the
expenses as listed above will form part of the base cost of the asset.
EXAMPLE 7.4
Required:
Calculate the base cost of the townhouse for capital gains tax purposes.
Information:
During the current year of assessment, Berly Sondag sold a townhouse in which she has never lived. She
provides the following information:
1. She purchased the townhouse in November 2001 for R445 000. She paid transfer duty of R54 000 and
legal fees amounting to R11 870 at that stage.
2. She had some alterations and repairs done to the townhouse from the date of acquisition to the date of
sale:
R
(a) Kitchen improvement 45 000
(b) Repainting of the townhouse (deductible for income tax purposes) 15 500
(c) Leaking roof repaired (deductible for income tax purposes) 12 750
3. The interest on the bond for the period of ownership amounted to R178 000.
4. She sold the townhouse on 31 October 2017 for R955 000 (the selling price included estate agent’s
commission of R25 000).
Solution
As Berly purchased the townhouse after 1 October 2001, she can add all the qualifying expenses together
and no adjustment needs to take place. One should look at each cost individually.
Calculation of base cost:

R
Actual cost of the townhouse 445 000
Transfer duty 54 000
Legal fees on purchase 11 870
Kitchen improvement 45 000
Repainting – deducted against rental income for income tax purposes nil
Leaking roof repaired – deducted against rental income for income tax purposes nil
Interest on bond – deducted against rental income for income tax purposes nil
Agent’s commission on sale of townhouse 25 000
Base cost of townhouse 580 870
Assets purchased before 1 October 2001

Assets purchased before the introduction of capital gains tax need special treatment, because part
of the possible future gain on these assets relates to a time before the implementation of capital
gains tax. Therefore, part of the gain should not be subject to capital gains tax. The Act makes pro-
vision for recalculating a new base cost, i.e. one that represents the cost of the asset on 1 October
2001 (the day that SARS introduced capital gains tax) plus any expenses that the taxpayer incurred
on or after 1 October 2001. The Act refers to this ‘adjusted cost’ of the asset on 1 October 2001 as
the valuation date value of the asset. Taxpayers need to follow the rules as set out in the Eighth
Schedule to calculate the valuation date value of the asset, which means that they must first decide
which situation applies to each asset before calculating its base cost.
Valuation date value + any expenditure on/after 1 October 2001 = base cost.
Calculation of valuation date value:

Where proceeds > all expenditure (paragraph 26 of the Eighth Schedule)
The expenditure referred to is expenditure in terms of paragraph 20 of the Eighth

Schedule, as listed previously.
In this case, the valuation date value may be the greatest calculated by the following three methods:
1. The market value on 1 October 2001
The taxpayer can only use this method if a qualified valuator valued the asset before 30 Septem-
ber 2004. If a qualified valuator did not value the asset before this date, one of the other two
methods must then be used to calculate the valuation date value.
2. The time-apportionment base (TAB) cost
This calculation requires the use of a formula that takes the difference between the proceeds
and the base cost and allocates it between
• the part of the gain that relates to the time prior to the introduction of capital gains tax; and
• the part of the gain that relates to the time after the introduction of capital gains tax.
This formula can become quite long and complicated; therefore, SARS has introduced a TAB
calculator (available on the SARS website) in order to assist taxpayers to calculate the TAB cost.
One needs to be aware of the anti-avoidance tests, though. These tests are often referred to as
the ‘kink tests’ and are discussed below. The calculator takes these tests into account when cal-
culating the base cost. It is a valuable exercise to visit www.sars.gov.za/TaxTypes and select
Capital Gains Tax, or to use the following link:
http://www.sars.gov.za/TaxTypes/CGT/Pages/Time-apportionment-base-cost-calculators.aspx
and test the TAB calculator.
3. Twenty per cent (20%) of the proceeds (after reducing the proceeds by any paragraph 20
expenditure that the taxpayer incurred on or after 1 October 2001).
However, the Act does not allow the taxpayer to use the market value as the valuation date value if it
is the greatest, but the proceeds are equal to or less than () the market value. In this case, the
valuation date value will be the proceeds less expenditure incurred on or after 1 October 2001. This
provision serves as an anti-avoidance measure in the Act, because taxpayers can manipulate the
market value of the asset applicable to 1 October 2001 to ensure that they make a capital loss when
selling the asset.
EXAMPLE 7.5
Required:
Calculate the base cost of the following property for capital gains tax purposes.
Information:
Jessica James decided to sell a rental property she owned in Durban on 1 April 2017 for R1 060 000. She
purchased the property on 15 January 2000 for R360 000, and it was valued at R580 000 on 1 October 2001.
Using the TAB calculator, the time-apportionment base cost amounted to R433 354. Jessica repaired the
leaking roof at a cost of R16 000 during July 2003, which she was able to claim as a tax deduction. In De-
cember 2004, Jessica paid someone R28 000 to build a swimming pool and lapa, as she thought that this
would increase her chances of selling the property.
Solution
Note: This property does not qualify for the primary residence exclusion (see paragraph 7.2.7 below for an
explanation of what this is), as it is a rental property.
As Jessica purchased the property before 1 October 2001, an adjustment of the base cost is required, as
well as the calculation of the valuation date value. In order to do this, first establish into which situation this
asset falls by adding together all the expenditure. It would also be better to classify the expenditure accord-
ing to the time incurred, i.e. expenditure before or after 1 October 2001.
Before After Total

1 October 2001 1 October 2001
R R R
Cost of asset 360 000 360 000
Roof repair nil*
Swimming pool and lapa 28 000 28 000
Total 360 000 28 000 388 000
* The roof repair was claimed as a tax deduction during the 2004 year of assessment. Therefore, it cannot
be added to the base cost of the asset, as this would result in a double deduction.
Proceeds = R1 060 000, which exceeds the total expenditure of R388 000; therefore, the valuation date value
will be the greatest of the figures determined using the following three methods:
• Market value on 1 October 2001 = R580 000

• 20% × (proceeds less expenditure after 1 October 2001)
= 20% × (R1 060 000 – R28 000)
= R206 400
• Time-apportionment base cost = R433 354
Therefore, the valuation date value = R580 000 (market value), i.e. the greatest of the three figures.
Where the market value is the greatest, one must test the market value against the proceeds. In this case, the
proceeds do exceed the market value; therefore, one may use the market value as the valuation date value.
Base cost = valuation date value + expenditure after 1 October 2001
Base cost = R580 000 + R28 000 = R608 000
Where expenditure cannot be determined (paragraph 26 of the Eighth Schedule)

Where the taxpayer did not keep records of the expenditure or the cost of the asset, he or she can
choose the greater of the following as the valuation date value of the asset:
• the market value on 1 October 2001; or
• 20% of the proceeds after reducing the proceeds by any paragraph 20 expenditure that was
incurred on or after 1 October 2001.
There is no loss limitation in this situation, and the taxpayer may use the market value even if it cre-
ates a capital loss situation.
Where proceeds all expenditure (paragraph 27 of the Eighth Schedule)

Paragraph 27 does not allow the taxpayer to choose between different methods. Instead, if either the
taxpayer or SARS has determined the market value, the taxpayer will have to use the market value.
One of two scenarios will apply, depending on a comparison between the market value, proceeds
and expenditure before 1 October 2001.
Scenario 1: Where the market value is known

The taxpayer should ask the following two questions to determine into which category the asset will
fall:
1. Is the expenditure before 1 October 2001 the proceeds?
2. Is the expenditure before 1 October 2001 > the market value on 1 October 2001?
If the answer to BOTH questions is ‘yes’, the valuation date value will be the greater of
• the proceeds less any expenditure incurred after 1 October 2001.
If the answer to one or both questions is ‘no’, the valuation date value will be the lower of
• the time-apportionment base cost.
Scenario 2: Where market value is unknown or has not been determined

The valuation date value will be the time-apportionment base cost.
Paragraph 27 will be applicable to both a capital loss situation (i.e. proceeds < expend-
iture) as well as a break-even situation (i.e. proceeds = expenditure). Note the use of the
‘>‘ and ‘/’ symbols in the above discussion.
EXAMPLE 7.6
Required:
For each of the following circumstances, calculate the valuation date value of the assets (all purchased be-
fore 1 October 2001) that the taxpayer sold.
Information:
Asset Proceeds Market value on Time- Cost of asset

1 October 2001 apportionment
base cost
R R R R
1 120 000 80 000 100 000 125 000
2 120 000 130 000 110 000 95 000
3 120 000 130 000 110 000 125 000
(continued)
Solution
Asset 1
Test to determine which category the asset falls into:
• Do the proceeds exceed all expenditure? No

• Can expenditure be determined? Yes
Paragraph 27 is applicable (a capital loss situation)

• Has the market value been determined? Yes
• Is the expenditure before 1 October 2001 the proceeds? Yes
• Is the expenditure before 1 October 2001 > the market value on 1 October 2001? Yes
The valuation date value is the greater of:
• market value = R80 000; or

• proceeds less expenditure after 1 October 2001 = R120 000 – Rnil = R120 000.
Therefore, the valuation date value for asset 1 will be R120 000.
Asset 2

• Do the proceeds exceed all expenditure? Yes
Paragraph 26 is applicable (a capital gain situation)

The valuation date value is the greatest of:
• market value = R130 000;

• time-apportionment base cost = R110 000; or
• 20% × proceeds less expenditure after 1 October 2001 = 20% × (R120 000 – R0) = R24 000.
The market value is the greatest, but the proceeds are less than the market value. Therefore, the valuation
date value for Asset 2 will be the proceeds less any expenditure after 1 October 2001 = R120 000.
Asset 3
• Do the proceeds exceed all expenditure? No


• Is the expenditure before 1 October 2001 > the market value on 1 October 2001? No
The valuation date value is the lower of:

• time-apportionment base cost = R110 000.
Therefore, the valuation date value for Asset 3 will be R110 000.
The decision tree illustrated in Figure 7.3 is useful when determining the base cost of the asset.
Base cost
Asset purchased before Asset purchased on/after

1. Valuation date value PLUS Total of all expenditure

2. Total par 20 expenditure on/after in terms of par 20
1 October 2001
1. Calculate valuation date value (VDV)
Proceeds > Expenditure Proceeds İ

expenditure not determined expenditure
Greatest of: Greater of: Market value is known

• market value; • market value; or 1. Expenditure before
• TAB cost; or • 20% × (proceeds – 1 October 2001 ı
• 20% × (proceeds – expenditure on/after proceeds?
expenditure on/after 1 October 2001) 2. Expenditure before
1 October 2001) 1 October 2001 >
Anti-avoidance: If market market value?
value is greatest and pro- Yes to both:
ceeds are İ market value,
VDV will be greater of
then VDV will be proceeds
– expenditure on/after • market value; or
• proceeds –
1 October 2001
expenditure on/after
1 October 2001
No to one or both:
VDV will be the lower of
• market value; or
• TAB cost
or
Market value is not known:

VDV will be the TAB
2. Add expenditure on/after 1 October 2001
Figure 7.3: Determining the base cost of an asset

EXAMPLE 7.7
Required:
Calculate the base cost of the following assets that were sold during the year:
Information:
Asset A B C D E F
Selling price (proceeds) R120 000 R280 000 R340 000 R1 300 000 R987 000 R600 000
Original cost R150 000 R90 000 R200 000 R 900 000 R1 000 000 R400 000
Additional expenses
before 1/10/2001 nil nil nil R4 000 R20 000 nil
Additional expenses
after 1/10/2001 R5 000 nil R30 000 R7 000 R35 000 nil
Date purchased 1/7/1999 1/1/1987 1/9/2003 1/5/1999 2/2/2000 30/7/2001
Date sold 1/4/2017 1/7/2017 2/8/2017 1/2/2018 1/2/2018 30/4/2017
Market value on
1/10/2001 R100 000 R92 000 R210 000 R1 500 000 R1 200 000 R500 000
TAB R144 652 R181 935 n/a R961 902 R1 013 080 R411 111
Solution
Asset A
The taxpayer purchased the asset before 1 October 2001; therefore, a valuation date value needs to be cal-
culated. The proceeds (R120 000) are less than all expenditure (R150 000 + R5 000 = R155 000).

• Is the expenditure before 1 October 2001 > the market value on 1 October 2001? Yes
The valuation-date value is the greater of:

• proceeds less expenditure after 1 October 2001 = R120 000 – R5 000 = R115 000.
The valuation date value will be R115 000.
The base cost of Asset A will be the valuation date value + expenditure after 1/10/2001, i.e. R115 000 +
R5 000 = R120 000.
Asset B
culated.
As the proceeds exceed the expenditure, the valuation date value will be the greatest of:

• 20% x proceeds less expenditure after 1 October 2001 = 20% × (R280 000 – R0) = R56 000.
Therefore, the valuation date value will be R181 935, and the base cost will also be R181 935, as there was
no expenditure after 1 October 2001.
(continued)
Asset C
The taxpayer purchased the asset after 1 October 2001; therefore, the base cost will be R200 000 + R30 000
= R230 000.
Asset D
culated. As the proceeds exceed the expenditure, the valuation date value will be the greatest of:
• market value = R1 500 000; or

• 20% × proceeds less expenditure after 1 October 2001 = 20% × (R1 300 000 – R7 000) = R258 600.
The market value is the greatest, but the proceeds are less than the market value; therefore, the valuation
date value is the proceeds less expenditure after 1 October 2001:
R1 300 000 – R7 000 = R1 293 000
The base cost of the asset will be R1 293 000 + R7 000 = R1 300 000.
Asset E
The taxpayer purchased this asset before 1 October 2001; therefore, a valuation date value needs to be
calculated.
The proceeds (R987 000) are less than all expenditure (R1 000 000 + R20 000 + R35 000 = R1 055 000).

• Is the expenditure before 1 October 2001 >the market value on 1 October 2001? No
The valuation date value is the lower of:
• market value = R1 200 000; or

• time-apportionment base cost = R1 013 080.
The valuation date value will be R1 013 080.
The base cost of the asset will be R1 013 080 + R35 000 = R1 048 080.
Asset F
culated.
As the proceeds exceed the expenditure, the valuation date value will be the greatest of:

• 20% × (proceeds – Rnil) = 20% × R600 000 = R120 000.
The market value is the greatest, and the proceeds are greater than the market value.
Therefore, the valuation date value = R500 000.
The base cost of the asset will also be R500 000, as there were no expenses after 1 October 2001.
7.2.7 Exclusions
After calculating the capital gain or loss per asset, it is important to exclude (to disregard or ignore)
certain capital gains and losses before calculating the taxpayer’s aggregate capital gain or loss. The
exclusions from capital gains tax applicable to an individual are as follows:
J Primary residence exclusion

A primary residence is any residence (including a boat, caravan or mobile home) used by a
natural person as his or her main residence, mainly for domestic purposes. A person can only
have one primary residence at a time. Capital gains tax will arise on the sale of a primary resi-
dence, but there are two primary residence exclusions available to limit the consequences. A
person may not claim a primary residence exclusion for more than one residence at a time. In
order to determine which exclusion applies, one has to look at the proceeds of the residence
(i.e. the selling price) and the capital gain or loss.
Proceeds exclusion
Where the proceeds received on the disposal of a primary residence amounts to R2 000 000 or
less, SARS will not take the capital gain on the sale of the primary residence into account when
calculating the taxpayer’s taxable income. There is a strict requirement, though: the taxpayer may
not use any portion of the residence for carrying on a trade (e.g. renting out a room) for any
period while he or she owned the residence. If a trade was carried on at any stage, the other
‘gain/loss exclusion’ is then applicable.
The ‘proceeds exclusion’ only disregards a capital gain. A capital loss may still be recog-
nised by the taxpayer. This makes it a very beneficial exclusion, hence the strict require-
ment that no trade was carried on.
Gain/loss exclusion
Where the ‘proceeds exclusion’ does not apply, a natural person may then disregard up to
R2 000 000 of either a capital gain or a capital loss on the disposal of a primary residence. Also,
where the residence is owned by more than one person, and both of them use it as a primary res-
idence, the R2 000 000 must be apportioned (shared) between them in proportion to their owner-
ship of the residence.
Note that, unlike the ‘proceeds exclusion’, a taxpayer is allowed to carry on a trade in the primary
residence. Where a trade is carried on, the full gain (or loss) will not qualify for the R2 000 000
exclusion – only the portion used for domestic (or non-trade) purposes may be disregarded.
These limitations will be discussed in the next paragraph.
The R2m ‘gain/loss exclusion’ disregards both a capital gain and a capital loss.
Primary residence exclusions

Base cost
Look at proceeds Look at capital gain/loss

Asset purchased before Asset purchased on/after
Selling price is R2m or less For portion where no trade was carried on
No trade carried on R2m of gain is excluded
Full gain is excluded R2m of loss is excluded
Figure 7.4: The primary residence exclusions
The only time that the ‘gain/loss exclusion’ of R2 million will be apportioned is when more
than one person has an interest in a residence, for example, if a husband and wife each
own 50% of a residence, they will each only be entitled to an exclusion of R1 000 000.
EXAMPLE 7.8
Required:
Calculate the capital gain (if any) that will arise if
(a) Samantha is not married; or

(b) Samantha and Louis are married in community of property.
Information:
Samantha Pantha sold her house for R3 500 000. She purchased it on 1 August 2002 for R1 300 000. She did
not make any improvements to her house, but she paid agent’s commission of R25 000 on the sale. She did
not use any portion of the house for trade purposes.
Solution
Part A
As the house was sold for more than R2 000 000, the gain will be taken into account.
Calculation of capital gain

R
Proceeds 3 500 000
Less: Base cost:
Cost of house (1 300 000)
Agent’s commission (25 000)
Capital gain 2 175 000
Less: Primary residence ‘gain/loss exclusion’ of R2 000 000 (2 000 000)
Capital gain 175 000
(continued)
Part B
Calculation of capital gain

R
Proceeds 3 500 000
Less: Base cost:
Cost of house (1 300 000)
Agent’s commission (25 000)
50% will be taxed in Samantha’s hands (R2 175 000 × 50%) 1 087 500
Less: Primary residence ‘gain/loss exclusion’ (she only qualifies for 50%)
R2 000 000 × 50% = R1 000 000, therefore (1 000 000)
Capital gain 87 500
Limitations on the primary residence ‘gain/loss exclusion’

The primary residence ‘gain/loss exclusion’ of R2 000 000 will:
• only apply in respect of two hectares of property used for domestic or private purposes (this
implies an apportionment of the excluded capital gain or loss where the property is larger than
this);
• not apply to any capital gain or loss in respect of a period on or after the valuation date when the
person was not ordinarily resident in the primary residence; and
• not apply to any capital gain or loss in respect of that part of a primary residence that has been
used for the carrying on of a trade after the valuation date.
Residential house used for trade purposes

How would it affect the primary residence exclusion if a portion (e.g. 10%) of a primary residence
was used as a home office and claimed as such for income tax purposes, and there was a capital
gain of R3 000 000?
R
The capital gain attributable (linked to) to the trade portion
of the residence (R3 000 000 × 10%) 300 000
The capital gain attributable (linked to) to the primary residence (R3 000 000 × 90%) 2 700 000
Less the primary residence exclusion (refer to Note) (2 000 000)
Capital gain on primary residence 700 000
Note: The R2 million exclusion is used in full against the R2 700 000 (primary residence gain). Therefore, the
amounts of R700 000 (the portion of the capital gain not covered by the R2 million exclusion) and R300 000
(the portion of the capital gain that is not in respect of a primary residence) would be subject to CGT; i.e. the
total gain on the house would be R1 000 000.
If more than 50% of a primary residence is used for trade purposes, the taxpayer will not
qualify for any primary residence exclusion, as the residence is not used mainly for
domestic purposes.
J Personal-use assets
Personal-use assets are any assets that a natural person uses mainly for purposes other than
the carrying on of a trade. Once again, circumstances can change the nature of an asset, for ex-
ample, if a person uses his or her motor vehicle mainly for business use, it will not be a personal-
use asset. Examples of personal-use assets include:
• personal furniture;
• antiques;
• private art collections;

• private motor vehicles; and
• personal jewellery.
The following are not personal-use assets:
• gold or platinum coins;
• immovable property;
• aircraft (empty mass of more than 450 kg);
• boats (length of more than 10 m); and
• financial instruments.
Capital gains and capital losses on personal-use assets are excluded when calculating the sum
of capital gains or losses of a natural person. This rule, therefore, benefits the taxpayer if he or
she had a capital gain, but places him or her at a disadvantage in respect of capital losses.
When encountering the disposal of a personal-use asset, one need not calculate the
capital gain or loss, as one will fully exclude it from the aggregate capital gain or loss.
J Retirement benefits
Lump-sum benefits from a pension, provident or retirement annuity fund are not subject to capital
gains tax.
J Compensation
Compensation for personal injury, illness or defamation will not create a capital gain for capital
gains tax purposes.
J Gambling, games and competitions

A natural person will not be subject to capital gains tax on a disposal relating to any gambling or
competition authorised by, or conducted in terms of the laws of the Republic, for example, cash
winnings from the National Lottery, the sale of tickets at a profit or loss, or prizes. However,
should a natural person win the American lottery, for example, this amount would be subject to
capital gains tax.
J Donations to public benefit organisations

Assets donated to public benefit organisations will not be subject to capital gains tax.
J Small business assets

Where a person sells a small business (very simply defined as a business with assets with a
market value of R10 million or less), SARS allows an exclusion of the capital gains on the assets
up to a maximum of R1 800 000 (during a person’s lifetime) for capital gains tax purposes when
calculating the aggregate capital gain or loss.
7.2.8 Limitation of capital losses

There are certain capital losses that the taxpayer may not use to reduce an aggregate capital gain in
the current year of assessment, or to increase an aggregate capital loss to be carried forward. SARS
excludes the capital loss on the disposal of the following assets if the taxpayer did not use the asset
for trade purposes:
• aircraft exceeding 450 kg; and
• boats exceeding 10 m.
For these assets, one will consider a capital gain, but exclude a loss. Note that these
were two of the assets that were specifically excluded from being regarded as personal-
use assets (refer to paragraph 7.2.7, under the heading ‘Personal-use assets’).
7.2.9 General
No capital gains tax will be payable on the transfer of assets between spouses. However, SARS will
deem the spouse receiving the asset to have purchased the asset on the original purchase date for
the same original cost and to have used the asset for the same use as the spouse who transferred
the asset. This is called a ‘roll-over’.
Where an asset is donated (other than to a spouse) or sold for less than its market value, the disposal
will trigger capital gains tax. For purposes of the capital gains tax calculation, the value of the pro-
ceeds will be deemed to be the market value of the asset on the date of donation. In addition to
capital gains tax implications, the donation of an asset could also attract donations tax.
7.3 Donations tax

The second capital transfer tax that we will examine is donations tax. Section 55 of the Income Tax
Act (sections 54 to 64 contain the rules for donations tax) defines a donation as any gratuitous
disposal of property or any gratuitous waiver or renunciation of a right. Therefore, a person giving
away any asset and getting nothing in return will be making a donation.
When a donation takes place, the person donating the asset (the donor) has to pay donations tax at a
rate of 20% of the value of the donated property. A person may donate up to R100 000 per annum
without attracting donations tax; donations exceeding this value are subject to 20% donations tax.
Donations tax is only applicable to South African residents; it does not apply to non-
residents, even if they donate a South African asset.
The donor must pay donations tax for each donation by the end of the month following the month
during which a donation took place (i.e. donations are not linked to a year of assessment). For ex-
ample, if the donation occurred on 15 October 2017, any resulting donations tax has to be paid by
30 November 2017. If the donor fails to pay within this time, SARS will hold the donor and the donee
jointly liable for the tax.
Apart from out-and-out donations, the Commissioner will also deem a donation to have
taken place where he or she considers the price paid for property to be inadequate. That
is, where some money is given for the property but it is less than the actual market value
of the property donated.
7.3.1 Value of the donation

If the donor is the owner of the property that he or she donates, the value of the donation will be the
fair market value of the property on the donation date.
Section 55 defines fair market value as being the price that the seller would obtain on the sale of
the property between a willing buyer and a willing seller dealing at arm’s length in an open market.
An exception to this rule is the value of farming property. Farming property is valued at 70% of its
market value for donations tax purposes.
Where the donation in question is a deemed donation, the value of the donation may be
reduced by any amount paid by the donee.
7.3.2 Exemptions
Certain specific donations will not attract any donations tax.
Those applicable to individuals are:
• donations to the spouse of a donor where the spouse is not separated from the donor;
• donations made in contemplation of death;
• donations in terms of which a donee will only receive the benefit after the donor dies;
• donations cancelled within six months;
• donations to any traditional council, traditional community or tribe;
• the donating of property that is situated outside South Africa, which the donor acquired before
becoming a resident, or property that the donor received as a donation or inheritance from a non-
resident;
• donations to any approved public benefit organisations;
• voluntary awards that have been included in the gross income of the donee;
• donations to trusts;
• the donating of the right to use farming land given to the child of the donor; and
• actual contributions made by a donor towards the maintenance of any person as the Commis-
sioner considers reasonable.
There are also some general exclusions from donations tax:
• Donations tax is not payable on the value of any casual gifts made by the donor during the year
of assessment up to a value of R10 000.
• A natural person does not pay donations tax on the first R100 000 donated during a year of
assessment. This exemption does change from time to time. In each year of assessment, the
R100 000 can be made up of a number of donations. Each time a donation is made, the balance
of the R100 000 will still be available, until it is used up.
7.3.3 Calculation of donations tax

Figure 7.5 illustrates how to decide whether the calculation of donations tax applies to a donation.
Donation of an asset
Is it one of the specific exemptions?
NO YES
Value of property
Less: Annual exemption No donations tax
(R100 000 or balance left over)
x 20%
Figure 7.5: How to decide whether the calculation of donations tax applies to a donation
EXAMPLE 7.9
Required:
Indicate the donations tax payable for each of the following donations, as well as the required date of pay-
ment.
Information:
Gayle Giveaway (who had just won a large sum of cash at a casino) entered into the following transactions
during the current year of assessment:
J 1 April: donated R10 000 to her favourite public benefit organisation.
J 30 May: gave R75 000 to her former husband, Gavin, whom she divorced in the previous year of
assessment.
J 16 June: donated R20 000 to her former husband’s daughter, to pay towards her university education.
J 3 July: told her boyfriend that if she died while on a scuba diving expedition in Dubai, he could have her
MWB sports car, valued at R670 000. She survived the trip and returned home at the end of July.
J 30 August: told a cousin that he no longer needs to repay a debt of R60 000 owing by him since
1 January at a simple interest rate of 8% per annum. The loan capital, together with interest, was due on
31 August of the current year.
J 5 September: donated R85 000 for the maintenance of her mother, who lives in an old age home.
J 11 November: gave the use of her holiday home in Durban to her sister for the rest of her lifetime. This
usufruct is valued at R330 650.
Solution
1 April
A donation to a public benefit organisation is a specific exemption; therefore, no donations tax will be
payable.
30 May
As Gayle and Gavin are divorced, no specific exemption is available. However, the R75 000 is less than the
general exemption of R100 000, and will not be subject to donations tax.
16 June
This donation is a specific exemption, as it is for the maintenance of a person. The Commissioner should
consider it reasonable, and no donations tax will be payable.
3 July
This is a donation in contemplation of death; therefore, it was a specific exclusion at the time of the donation
(i.e. no donations tax will be payable). When Gayle returned unharmed from her trip, the donation fell away.
30 August
This donation has no specific exclusion. This implies the calculation of the value of the donation, while also
accounting for the interest.
R60 000 (capital) + R60 000 × 8% × 8 months/12 months (interest) = R63 200.
Gayle has already used R75 000 of her R100 000 general exemption; therefore:
R63 200 – R25 000 = R38 200 × 20% = R7 640, payable by 30 September.
5 September
Any amount given for the maintenance of a person is exempt from donations tax, as long as the Commis-
sioner considers it reasonable.
11 November
Usufruct is the legal use of an asset that belongs to another person. The Act provides for the calculation of
this value, and SARS will consider the R330 650 to be a donation. As Gayle has used up the whole amount of
her general exemption, she will be required to pay 20% donations tax on this donation. This will amount to
R66 130, which she will have to pay by 31 December. If Gayle does not pay the donations tax, her sister will
be liable; however, the sister will be able to claim the amount back from Gayle.
When a person makes a donation, an IT144 needs to be completed to inform SARS about the
donation. This form needs to be completed even if the donation is exempt from donations tax.
The general exemption of R100 000 is available for all donations that were made during a
year of assessment, BUT the donor needs to declare each individual donation to SARS by
the end of the month following the date of donation.
Figure 7.6: An IT144

7.3.4 Donations tax and capital gains tax

When a person donates an asset, the donation will be a disposal for capital gains tax purposes. This
means that capital gains tax as well as donations tax will be payable on the transaction. A portion of
the donations tax can be included in the base cost of the asset for capital gains tax purposes, to
prevent the person from paying double tax. When calculating the amount of donations tax that must
be included in the base cost, the following formula is used:
(M – A)
Y= ×D
M
Y= donations tax to be included in base cost
M= market value of the donated asset (on which the donations tax was based)
A= the base cost of the asset
D= the total amount of donations tax that was payable in respect of this asset
Only the person who actually paid the donations tax (i.e. either the donor or the donee)
can include the tax in the base cost of the asset. Also bear in mind that, for capital gains
tax purposes, donations are deemed to take place at market value. This means that the
donor’s proceeds are deemed equal to the market value. The donee (the person who
receives the asset) will have a base cost equal to that same market value.
EXAMPLE 7.10
Required:
(a) Calculate the donations tax that Delise will have to pay.
(b) Calculate the taxable capital gain that Delise will have to include in her taxable income.
Information:
Delise Francis purchased a gold coin for R160 000 on 1 December 2003. On 4 April 2017, when the coin had
a market value of R270 000, she gave the coin to her best friend, who was opening a jewellery store and
wanted the coin for her display. In terms of their agreement, Delise would be responsible for the donations
tax. Delise made no other donations during the year, nor did she dispose of any other assets.
Solution
Calculation of donations tax:
R270 000 – R100 000 (general exemption)
= R170 000 × 20%
= R34 000 payable by 31 May 2017
Calculation of taxable capital gain:
R
Proceeds 270 000
Less: Base cost:
Actual cost (160 000)
Donations tax (13 852)
(M – A)
Y= ×D
M
M= R270 000
A= R160 000
D= R34 000
Capital gain 96 148

Gain 56 148
× 40% inclusion rate
Amount to be included in taxable income as a taxable capital gain 22 459
7.4 Estate duty

The third form of capital transfer tax relates to the estate of a person who has died. SARS levies
estate duty in terms of the Estate Duty Act 45 of 1955 (as amended) (the Estate Duty Act). The death
of a person leads to certain estate duty consequences. The deceased’s estate must pass all his or
her assets on to other people; either by distributing the assets according to a will, or, where there is
no will, by transferring the assets by law in terms of intestate succession. Either way, the estate might
even need to sell some assets to cover liabilities. SARS will levy estate duty on the world-wide assets
of persons who were South African residents at the time of their death, or on any asset situated in
South Africa where the deceased was not a South African resident.
The current estate duty calculation is 20% of the dutiable value of an estate. The dutiable value of the
estate for estate duty purposes is calculated as follows:
Property
Add: Deemed property
Equals: Gross value of property
Less: Deductions
Equals: Net value of estate
Less: Abatement (R3 500 000)
Equals: Dutiable value of the estate
EXAMPLE 7.11
Required:
Calculate how much estate duty John Martin’s estate will have to pay.
Information:
John Martin, who is a South African resident, died during the current year of assessment. The following infor-
mation relates to John:
R
Property situated in New Zealand 900 000
Property situated in South Africa 2 800 000
Deemed property (insurance policy) 1 200 000
Deductions that will be allowed 750 000
Solution
As John is a South African resident, the estate will have to pay estate duty on all his world-wide property.
R
New Zealand property 900 000
South African property 2 800 000
Deemed property 1 200 000
Gross value of property 4 900 000
Less: Allowable deductions (750 000)
Net value of estate 4 150 000
Less: Abatement 3 500 000
Dutiable amount of estate 650 000
Estate duty (× 20%) 130 000
When a person dies and estate duty is payable, an REV267 form has to be completed and submitted
to SARS.
(continued)
(continued)
(continued)
(continued)
(continued)
(continued)
(continued)
Figure 7.7: A REV267

7.4.1 Property and deemed property

Property, for estate duty purposes, includes every asset of a person; for example house, car, furni-
ture, money in the bank, other properties and businesses. Property also includes fiduciary, usufruc-
tuary or other similar interests, annuities charged upon the property, and the right to an annuity.
In addition to the actual assets that a deceased person owned, the Estate Duty Act will also include
property in the deceased person’s estate that would otherwise not have been included. The Act
refers to this property as ‘deemed property’, which includes the following for estate duty purposes:
J Life insurance policies

Certain domestic insurance policies that pay out on the death of a person are included in the
person’s estate for estate duty purposes. The requirements for this type of policy are that the policy:
• must be on the deceased’s life regardless of who might be the owner or the beneficiary of the
policy; and
• pay out must take place in South Africa upon the insured’s death.
The amount to be included in the estate is the lump sums plus the annuities payable under poli-
cies on the life of the deceased, less any premiums paid by the person who is the beneficiary of
the policy (person receiving the pay-out). The value of the premiums paid by the beneficiary is
subject to an increase of interest calculated at 6% per annum (from the date of payment to the
date of death). Certain policies are excluded from the estate, for example, a policy where the
proceeds of the policy are payable to:
• the surviving spouse or child of the deceased under a duly registered antenuptial contract; or
• the partner, co-shareholder or co-member of the deceased, provided that the policy was
effected to assist the person acquiring the deceased’s share in the partnership, company or
close corporation, and the deceased paid no premium on the policy.
Where a husband and wife are married in community of property and one of them dies,
leaving the other as the beneficiary, only half the premiums plus interest will be an allow-
able deduction against the proceeds of the policy.
J Lump-sum payments
Any lump sums that were payable from a pension, provident or retirement annuity fund before
1 January 2009 because of the death of the person, are included in the deceased person’s
estate. This does not include annuities payable by the fund. SARS allows the estate to deduct the
contributions paid by the beneficiary (plus interest at 6% per annum from the date of payment to
date of death) from the lump sum before its inclusion in the estate.
Retirement benefit lump sums received on or after 1 January 2009 because of the death of a
person, will not be included in the estate as deemed property. The retirement benefit (lump sum
or annuity) is also specifically not included in the property of the estate.
J Donations that were exempt

Property donated by the deceased in terms of a donation that was exempt from donations tax
(i.e. in contemplation of death, or where the benefit only passes on the death of the donor), must
be included in the value of the estate for estate duty purposes. It is included at the fair market
value as on the donation date.
J Accruals in terms of the Matrimonial Property Act 88 of 1984

When people marry in terms of the accrual system under the Matrimonial Property Act 88 of 1984
(the Matrimonial Property Act), the spouses agree to share, at the end of the marriage (by either
divorce or death), those assets of each spouse acquired during the marriage. In terms of this
legality, the spouse with the smaller value of assets has a claim against the spouse with the larger
value of assets. This is the claim (should there be a claim for the deceased spouse) that will be
included in the value of the estate.
J Property which the deceased was competent to dispose of

This deemed property is only included where it has not been included elsewhere, and where the
deceased had the power, immediately before his or her death, to sell or dispose of the property,
or to change or take back any donation made by him or her (for own benefit, or for the benefit of
the estate).
7.4.2 Valuation of property

The value of property to be included in an estate will depend on the type of asset and on what hap-
pens to the asset in the estate.
J Property sold
The proceeds received (on the sale of property included in the estate) will serve as the value of
the sold property to be included in the estate.
J Property not sold
Any unsold asset will be valued at the fair market value of the property as on the date of death,
unless there is another specific rule (e.g. the estate must calculate agricultural property value at
70% of the market value).
J Unlisted shares
Shares not listed on any stock exchange, or a member’s interest in a close corporation, must be
valued according to the value as on the date of death. The Estate Duty Act provides for special
requirements that the evaluator must take into account.
J Fiduciary, usufructuary and other similar interests
These interests have very specific valuation rules in terms of the Estate Duty Act.
J Other
The value of property not specified in terms of section 5 of the Estate Duty Act must be valued at
the fair market value as on the date of death.
7.4.3 Deductions
The Estate Duty Act allows the following deductions, which can reduce the gross value of the estate.
J Deathbed and funeral expenses
This deduction is limited to an amount that the Commissioner considers reasonable. It will include
the burial or cremation and the tombstone. Payments to medical practitioners, pharmacies and
similar payments that relate to the last illness of the deceased will also be deductible.
J Debts due in South Africa
This includes all claims against the estate. The debts must be due to persons who are ordinarily
resident in the Republic. When people die, they cease to be taxpayers on their date of death, and
the estate (managed by a trustee) becomes the taxpayer until the estate is finalised (wound up).
Any income tax (including capital gains tax) that is payable by the deceased taxpayer will also be
a claim against the estate and deductible in terms of this provision.
J Administration charges
The general costs of winding up the estate, as allowed by the Master of the High Court, are
deductible from the gross value of the estate.
J Expenditure necessary to comply with the Estate Duty Act
This expenditure is different from the expenditure mentioned above and could include any legal
costs or fees paid to professional persons such as valuators, accountants or attorneys.
J Foreign assets held by the deceased

This deduction applies when the deceased’s estate includes property (movable or immovable)
situated outside the Republic, and he or she:
• acquired the property before becoming a resident in the Republic;
• acquired the property by way of donation or inheritance (and the donor was a non-resident at
that time); or
• purchased the asset out of the proceeds of foreign property he or she acquired before be-
coming a resident.
J Debts due outside the Republic

If the deceased owes money to persons ordinarily resident outside the Republic, the debts are
only deductible as part of the estate if the estate paid the debts by using money received from
the sale of assets that formed part of the property of the estate. The idea is that the estate must
first pay these debts from foreign assets that are not property of the estate, after which this provi-
sion will allow the leftover amount as an allowable deduction.
J Certain limited rights

This deduction is in respect of certain limited rights held by the deceased, where the rights revert
to the original donor.
J Public benefit organisations

This deduction relates to property that has been included in the value of the estate, where the
property actually accrues to one of the following:
• an approved public benefit organisation that is exempt from tax; or
• any institution, body or board that is exempt from tax in terms of section10(1)(cA)(i) of the
Income Tax Act: or
• the state or any municipality within the Republic.
J Improvements made by a beneficiary

Where the value of any property, which is included in the estate, has increased because the
person inheriting it has made improvements to it during the time the deceased was alive, with the
deceased’s approval, the increase in value is deductible in terms of this provision.
J Improvements made by a holder of limited interest

SARS will allow the increase in value of any fiduciary, usufructuary or other similar interest as a
deduction where the value of any property that is included in the estate has increased because a
person, who will receive a limited interest in that property, has made improvements to it during
the lifetime of the deceased with his or her approval.
J Claim by surviving spouse

As discussed under deemed property (refer to paragraph 7.4.1), the situation may arise that the
surviving spouse has the smaller estate, in which case the claim against the deceased spouse
can be deducted from the value of the estate.
J Usufructuary or similar interest in terms of predeceased spouse

Where the deceased’s spouse has already died (predeceased spouse), and property that is now
included in the deceased’s estate has already been included in the predeceased spouse’s es-
tate, the value of this property may be deducted from the value of the deceased’s estate.
Property that was not included in the predeceased spouse’s estate is not deductible from the
deceased’s estate.
J Books, pictures and art

The Estate Duty Act allows the estate to deduct the value of any items (e.g. books, pictures and
art) that a person lent to the state or a local authority in the Republic for 30 years or more.
J Valuation of unlisted shares

If there is any deemed property included in the estate that has been taken into account in deter-
mining the value of any unlisted shares or a member’s interest in a close corporation, and these
shares or member’s interests have been included in the estate, the amount will be deductible to
the extent that the amounts have been included twice.
Deemed property includes:
• domestic insurance policies;
• lump sums from funds;
• exempt donations;
• accrual claims against the spouse; and
• competent disposals by the deceased.
J Property left to the surviving spouse

All property accruing to the surviving spouse, and included in the deceased’s estate, is deduct-
ible. The estate cannot deduct an amount twice; i.e. the estate cannot deduct any amount al-
ready deducted again.
SARS will not allow this deduction where the surviving spouse has to dispose of the
property to any other person or trust in terms of the will of the deceased.
7.4.4 General abatement of R3 500 000

Every estate receives an abatement of R3,5 million as a deduction against the net value of the estate.
The left-over amount is subject to 20% estate duty. Where a deceased leaves ALL his or her assets
to the surviving spouse, the R3,5 million abatement that has not been used, will be transferred to the
surviving spouse’s estate. This means that when the surviving spouse dies, there will be a R7 million
abatement available for that estate.
7.4.5 Death and capital gains tax

Deceased persons are deemed to have disposed of their assets to their deceased estate for pro-
ceeds equal to the market value of the assets on the date of death, and the deceased’s estate shall
be deemed to have acquired the assets at a cost equal to the market value. This means that when a
person dies, there will be capital gains tax on all the deceased’s assets, because SARS will deem
them as disposed of via the estate. This taxable capital gain will be included in the last assessment of
the taxpayer (as a natural person) before the estate becomes the taxpayer.
This deeming rule does not apply to the transfer of assets to the surviving spouse or
assets that the deceased bequeathed to an approved public benefit organisation; nor
does it apply to certain long-term insurance policies or certain interests in pension, provi-
dent or retirement annuity funds.
In the year during which a person dies and capital gains tax is levied in terms of this deemed dispos-
al, the annual exclusion of R40 000 increases to R300 000.
Either the estate will distribute these assets to heirs or beneficiaries, or it will be required to sell the
assets to pay for expenses. The way in which assets in the estate are disposed of will determine the
capital gains tax implications.
J Assets that are transferred to the heirs

Where an asset passes from a deceased’s estate to an heir (excluding the surviving spouse and
a public benefit organisation), a roll-over provision applies. In essence, it means that no capital
gains tax will arise at this point, as the estate is deemed to dispose of the asset at its base cost
(the market value of the asset on the date of death, plus any expenses incurred since the date of
death), meaning that the estate will not make any gain or loss.
However, SARS treats the heir who inherits the asset as having acquired the asset at the same
base cost value as that at which it deemed the estate to have disposed of the asset.
J Sale of assets
Where the deceased’s estate sells the assets to anyone other than heirs, the capital gain is tax-
able in the hands of the estate (which has now become the taxpayer). In this case, SARS treats
the estate as a natural person for capital gains tax purposes and allows the estate to deduct a
R40 000 annual exclusion. Additionally, where the estate sells the primary residence within two
years of the date of death, SARS will allow a primary residence exclusion. The base cost of the
asset will be the market value of the sold asset as on the date of death.
EXAMPLE 7.12
Required:
Calculate the estate duty that is due on the following estate.
Information:
Nico Gumede, who was a South African resident, and divorced, died on 5 September 2017. The following
information relates to Nico’s estate.
R
J Residence: valuation 3 000 000
J Townhouse: during the previous year of assessment, Nico donated the usufruct of the
townhouse to his daughter. On the date of the donation, the value of the townhouse
amounted to R600 000. The usufruct is valued at R690 000, and the market value of the
townhouse on the date of Nico’s death amounted to R700 000.
J Proceeds of sale of furniture and fittings 890 000
J Telephone account due to Telkom 678
J Income tax owing to SARS (including capital gains tax) 25 980
J Funeral expenses 15 000
J Executor’s remuneration 136 500
Solution
Property and deemed property
R R
Residence 3 000 000
Townhouse 700 000
Less: Usufruct (690 000) 10 000
Sale of furniture 890 000
Gross value of property 3 900 000
Less: Deductions
Telephone account (678)
SARS (income tax due) (25 980)
Funeral expenses (15 000)
Executor’s remuneration (136 500)
Net value of estate 3 721 842
Less: Abatement (3 500 000)
Dutiable amount 221 842
Estate duty payable: R221 842 × 20% = R44 368

7.5 Summary
This chapter discussed three taxes that all relate to the transferring of assets between persons.
Capital gains tax arises when a taxpayer sells or donates an asset, or even where a person dies.
Donations tax arises when a taxpayer donates an asset, and estate duty arises on the death of a
person.
Donation of an asset
Is it one of the specific exemptions?
NO YES
Value of property
Less: Annual exemption No donations tax
(R100 000 or balance left over)
× 20%
Figure 7.8: Donations tax framework

Disposal of an asset
Is the item a personal-use asset?
Yes No
Proceeds
No capital gains tax Less: Base cost
Equals
Capital gain Capital loss
Is it a primary residence? Is it a primary residence?

Yes: Proceeds İ R2m = total exclusion; Yes: Proceeds İ R2m = full loss
or recognised; or
Proceeds > R2m = R2 000 000 Proceeds > R2m = R2 000 000
exclusion of gain exclusion of loss
No: Check for other special exclusions No: Is the loss limited?
Yes: Cannot be included in next step
No: Include loss in aggregate
Do this for each asset disposed of during the year
Add all the capital losses and all the capital gains of the individual assets
together
Aggregate capital gain Aggregate capital loss
Less: Annual exclusion Less: Annual exclusion

of R40 000 of R40 000
(or R300 000 if taxpayer died) (or R300 000 if taxpayer died)
× 40% Carry forward to the next year
Include in taxable income

calculation before the deductions
for retirement funds and donations
to public benefit organisations
Figure 7.9: The calculation of capital gains tax in its basic form
Property (any assets, including rights)

Add: Deemed property
• life insurance policies
• exempt donations
• matrimonial accruals
• competent disposals
Gross value of estate
Less: Deductions
• deathbed and funeral costs
• SA debts
• administration charges
• complying with the Act
• foreign assets
• debts from outside SA
• limited rights
• PBOs
• improvements made by beneficiary
• improvements made by holder of interest
• surviving spouse claim
• usufructuary or similar of predeceased spouse
• books, pictures or art
• unlisted shares
• property left to surviving spouse
Net value of estate
Less: R3 500 000 (plus additional surviving spouse abatement – if applicable)
Dutiable amount of estate
× 20%
Figure 7.10: Estate duty framework

QUESTION 1
Required:
For each of the following cases, calculate the taxable capital gain and answer any queries that the taxpayer
might have. Assume that the taxpayer in each case did not have any other disposals during the year of as-
sessment.
Information:
Taxpayer A
Alex and Alice (who are married in community of property) sold their house, which they had originally pur-
chased to lease to tenants. The house originally cost R190 000 on 1 December 1999, and was valued at
R400 000 on 1 October 2001. The time-apportionment base cost is R243 951. They sold the house on 15 May
2017 for R800 000. In April 2004, Berti and Belinda, the tenants, had a pool built on the property, which cost
them R35 000. Alex and Alice refunded this amount to them.
Taxpayer B
Betty Beech purchased an 8-metre yacht on 30 November 2000. She sails the yacht at weekends, and when
her children come to visit her, they take the yacht to go fishing.
Betty sold the yacht for R80 000 on 1 April 2017. The base cost of the yacht was R30 000. Betty paid for
improvements to the yacht, i.e. a global positioning satellite system, with an installation cost R15 000, and
repairs to the sails to the value of R8 000. Betty wants to determine the capital gain or loss on the disposal of
the asset.
Taxpayer C
On 1 August 2017, Carlos decided to return to the land of his ancestors, Portugal. He sold all his assets (all
purchased after 1 October 2001).
Lounge suite:
He managed to sell his lounge suite, which originally cost him R80 000, to a friend for R30 000.
Motor vehicle:
His personal motor vehicle originally cost R100 000. He was able to sell it to a used car dealer for R76 000.
Townhouse:
He originally purchased the townhouse in which he lived for R300 000. He has since added a garage, which
cost R40 000. He also had to have the leaking roof repaired at a cost of R6 000. He sold the townhouse on
17 August 2017 for R760 000. This amount included agent’s commission of R7 600 (he used the services of a
friend who is an agent).
Shares:
He sold all his shares for R200 000. These shares were an investment, and Carlos did not speculate. His
broker worked out (correctly) that the base cost of the shares amounted to R90 000.
(continued)
Taxpayer D
Derek Davies decided to start his own sea-tour business and purchased a 20-metre boat on 15 July 2004. He
used the boat for transporting holidaymakers between Durban and the Mozambique islands.
On 15 January 2018, he sold the boat for R600 000. The base cost of the boat was R650 000. Derek wants to
determine the capital gain or loss implications of the transaction.
Taxpayer E
Erika Eatright owns Healthy Snacks, a shop in a large shopping complex in Pretoria. She wants to retire from
the business and decides to sell the shop to a local businessman. Someone told Erika that she does not have
to pay capital gains tax on a portion of the capital gain when selling her small business. Please discuss the
capital gains tax implications with Erika.
Answers
\
QUESTION 2
Required:
Calculate the capital gains tax effect of the following transactions in respect of the 2018 year of assessment.
Information:
During the 2018 year of assessment Dr Donna (a 40-year-old unmarried South African) received the following
capital amounts:
1. On 1 April 2017, she sold her holiday home in George for R5 200 000. She had bought the house in
December 2009 for R2 900 000. In 2012, she had a helipad constructed at the back of her house at a
cost of R1 000 000. Dr Donna usually resides in Pretoria.
2. During July 2017, she sold her airplane for R6 500 000, as she only uses her helicopter and has no need
of the airplane. The purchase price of the airplane was R6 300 000 in 2010. It weighs more than 450 kg.
3. On 14 October 2017, she sold her vintage Mercedes Benz which she only used for private travel, for
R190 000. She had purchased the car at an auction for R70 000 in 2006.
4. Dr Donna stopped working after winning the South African National Lottery. She won R16 000 000 in
January 2018.
5. Dr Donna has an assessed capital loss of R250 000 from the 2017 year of assessment.
Answers
QUESTION 3
Required:
Calculate the donations tax payable by Cloos for each of the following donations.
Information:
On 15 June 2017, Miss Cloos Todeath, who was terminally ill, decided that she wanted to give away her pos-
sessions before her death. She gathered her family and friends around her and gave them the following gifts:
1. She gave her car, with a market value of R80 000, to her daughter.
2. She gave R5 000 to a political party (an approved PBO).
3. She gave her husband the balance of her bank account once all the gifts had been paid. This amounted
to R160 000.
4. Her brother, Farre, owed her R50 000, but she accepted R20 000 as the final and full payment.
5. She gave R60 000 to her church, the Berea Baptist church (an approved PBO).
6. She gave R70 000 to her daughter, to be used for a holiday. Her daughter returned the R70 000, as she
felt that her mother needed the money more than she did.
7. She donated a gold pen worth R20 000 to her medical doctor in contemplation of her death.
Answers
QUESTION 4
Required:
Calculate the estate duty payable on the following estate.
Information:
Cindy Swarz was married out of community of property (without accrual) to Joseph. She died during the 2018
year of assessment. The following assets, interests and liabilities were part of Cindy’s estate when she died:
R
1. Private residence (a sworn appraiser valued the property) 3 900 000
2. Shares in a company incorporated in the UK 1 330 000
3. Proceeds of an insurance policy on Cindy’s life paid directly to Kyle (Cindy’s son)
in terms of the policy conditions (premiums and interest at 6% on the policy
amounted to R95 000, which Cindy paid. This amount had already been taken
into account in the calculation of the proceeds) 280 000
4. Cash in bank account 256 000
5. Interest on bank account up to the date on which the account was closed 1 707
6. Fixed deposit 800 000
7. Funeral expenses 23 000
8. Clothing account outstanding 14 000
9. Outstanding bond on residence 100 000
10. Agricultural property (market value) 1 600 000
11. Master’s and executor’s fees 250 000
In terms of Cindy’s will, she bequeathed her entire estate to her son, Kyle.
Note: you may ignore any resulting capital gains tax and normal tax liabilities.
Answers
QUESTION 5
Required:
(a) Calculate the donations tax payable on the donations made on 1 July 2017.
(b) Calculate the taxable capital gains arising from the disposals on 31 October 2017.
(c) Calculate the estate duty payable arising from Jerry’s death on 1 January 2018.
Information:
Jerry Tomlin (aged 47) is unmarried and has an adopted daughter, Laura (aged 22). On 1 March 2017, Jerry
owned the following assets:
Asset Date of acquisition Original cost

R
Shares in RSA listed company 1 March 2005 800 000
Property in Durban 1 August 2012 1 600 000
Cash 900 000
Kruger Rands 13 June 2007 300 000
Holiday flat in Cape Town 1 December 1989 240 000
Household furniture 17 July 2009 160 000
6-seater aircraft 1 February 1998 150 000
Jerry made the following donations on 1 July 2017:
1. To his daughter: the shares in the RSA listed company, which had a market value of R940 000.
2. A cash amount of R75 000 to Cartoonz Trust, an approved public benefit organisation.
Jerry is considering buying a small business and for that he needs cash. Consequently, on 31 October 2017,
he sold the following assets to third parties at their market values:
1. The residential property situated in Durban was sold for R2 100 000. Jerry had purchased the three-
hectare property in Durban on 1 August 2012 for R1 600 000 and had lived in that house since then. You
may assume that the value of the house is negligible in relation to the land value and may be ignored in
your calculations.
2. The Kruger Rands were sold for R1 850 000. Jerry acquired the Kruger Rands as a long-term capital
investment.
3. The 6-seater aircraft was sold for R320 000. In February 1998, Jerry obtained his pilot’s licence and pur-
chased the aircraft as part of his hobby. The aircraft has an empty mass of 480 kg. On 1 October 2001,
the market value amounted to R210 000. The time-apportionment base cost was calculated as R190 476.
Jerry passed away on 1 January 2018, after making all the donations and disposals above. The following
property forms part of Jerry’s estate:
1. Cash amounting to R4 400 000.

2. The holiday flat in Cape town, which was valued at R1 600 000. The flat was acquired on 1 December
1989 for R240 000 and was only used during holidays. Jerry elected the market value on 1 October 2001,
which amounted to R450 000, as his valuation date value.
3. The household furniture was valued at R140 000.
Laura will inherit the holiday flat, furniture and any cash remaining in the estate, after payment of the amounts
listed below:
• Income tax payable to SARS (including any capital gains tax arising from Jerry’s death) of R35 000;
• Funeral expenses of R15 000;
• Master’s fees and administration costs of R22 000.
Answers
CHAPTER
8 Prepaid Taxes
Author: L Steenkamp (updated K de Hart)
Contents
Page
8.1 Introduction ........................................................................................................................... 202
8.2 Employees’ tax ...................................................................................................................... 203
8.2.1 Employer’s responsibilities ....................................................................................... 203
8.2.2 Calculation of employees’ tax ................................................................................... 213
8.2.3 Payment of employees’ tax ....................................................................................... 215
8.2.4 Employment tax incentive ......................................................................................... 216
8.3 Provisional tax ....................................................................................................................... 220
8.3.1 Calculation of provisional tax .................................................................................... 221
8.3.2 Additional tax, interest and penalties ....................................................................... 227
8.4 Summary ............................................................................................................................... 229
201

9 understand the importance and impact of employees’ tax on individuals.
9 understand when employees’ tax will be withheld from an individual’s salary.
9 understand how much employees’ tax will be withheld from an individual’s salary.
9 identify and complete the application for registration as an employer with SARS.
9 understand what the employment tax incentive is and how it works.
9 understand and explain when and how individuals are required to register as provisional tax-
payers.
9 calculate the provisional tax of an individual.
9 understand the consequences of late or non-payment, underestimation and late submission of
provisional tax payments.
8.1 Introduction
Chapter 6 explained the calculation of taxable income of a person receiving a salary, fringe benefits
and other income such as investment income. The individual could also have made a taxable capital
gain (as was determined in chapter 7), which would also be included in the individual’s taxable
income. After calculating the individual’s taxable income, one can determine the tax payable. SARS
provides a sliding scale for calculating the tax payable by an individual. As the rates change every
year, the rates for the 2018 year of assessment are as follows:
Taxable Income Tax rate
R0–R 189 880 18%
R189 881–R296 540 R34 178 + (26% of amount above R189 880)
R708 311–R1 500 000 R209 032 + (41% of amount above R708 310)
R1 500 001 and above R533 625 + (45% of amount above R1 500 000)
The tax payable is the amount of tax that the taxpayer owes to SARS. However, before paying this
amount of tax to SARS, a person can deduct the annual rebates (i.e. the primary, secondary and
tertiary rebates, the latter two being dependent on the person’s age), the medical tax credits (if the
person is a member of a medical fund and/or has incurred any qualifying medical expenses), as well
as any amounts of tax already paid over to SARS during the year. The rebates and credit amounts
change each year (refer to chapter 2 for more details). Employees’ tax and provisional tax are two
examples of such pre-paid taxes. This chapter will now consider each of these taxes in more detail.

J Employees’ tax J Additional taxes, interest and penalties
J Provisional tax
Chapter 8: Prepaid Taxes 203
Table 8.1: Framework for calculating normal tax of a natural
R

8.2 Employees’ tax
8.2.1 Employer’s responsibilities

Employees’ tax is a system in terms of which an employer, as an agent of SARS, deducts tax from the
salaries it pays to its employees, after which the employer pays this tax over to SARS on a monthly
basis. This section will look at the requirements the employer must meet for withholding and paying
over this tax to SARS on behalf of its employees.
Registering as an employer
Any business or person paying salaries, wages or remuneration of any kind to employees that is
subject to employees’ tax, must register with SARS for purposes of employees’ tax, because SARS
will consider such business or person to be an employer (as defined).
The employer can register electronically on eFiling, or by completing an EMP101e form and submit-
ting it to SARS within 21 business days after becoming an employer. The EMP101e form is available
on the SARS website (www.sars.gov.za) (refer to Figure 8.1).
(continued)
(continued)
(continued)
(continued)
Figure 8.1: An EMP101e form

SARS requires an employer to attach supporting documentation to this form when making the sub-
mission. The nature of this documentation varies depending on the nature of the person (e.g. indi-
vidual, partnership, company, trust) registering as an employer (refer to the ‘Notes’ pages at the
bottom of the EMP101e form). This form is obtainable from the SARS website at:
http://www.sars.gov.za/AllDocs/OpsDocs/SARSForms/EMP101e%20%20Application%20for%20Regis
tration%20PAYE%20SDL%20UIF%20%20External%20Form.pdf
Once registered, SARS expects the employer to make monthly submissions concerning the payment
of employees’ tax. The employer will have to make these monthly submissions on a monthly return
(EMP201) by completing and submitting the return electronically (using e@syFileTMEmployer,
e@syFileTMTax Practitioner, or eFiling), or at a SARS branch, or via post. SARS will issue a pre-
populated EMP201 form each time an employer wants to make a payment for PAYE, SDL and/or UIF,
as all these taxes are on the same form. The employer must pay the employees’ tax that has been
deducted over to SARS within seven days after the end of the month for which the tax was withheld,
but if the seventh day falls on a Saturday, Sunday or public holiday, the payment must be made not
later than the last business day before such day.
These cut-off dates also apply to contributions to the Skills Development Levy (SDL) and Unemploy-
ment Insurance Fund (UIF) (refer to chapter 9). SARS regards failure by an employer to submit a
monthly declaration of employees’ tax, as and when required under the Income Tax Act 58 of 1962
(as amended) (the Income Tax Act), as a criminal offence, liable on conviction to a fine or imprison-
ment of 24 months.
Penalties in terms of the Tax Administration Act 28 of 2011

In terms of the Tax Administration Act 28 of 2011 (TAA), SARS could regard the non-submission of
the monthly declaration of employees’ tax as an act of non-compliance (i.e. non-compliance with
procedural or administrative action or duty imposed or requested by the Income Tax Act), which may
become subject to a penalty (fixed-amount). An administrative non-compliance penalty means a
penalty imposed by SARS in accordance with Chapter 15 of the TAA. It comprises fixed-amount and
percentage-based penalties. A fixed-amount penalty is charged when an administrative obligation is
not complied with and the percentage based penalty is generally imposed when certain amounts of
tax are not paid.
Administrative non-compliance penalty
Fixed-amount (general) Percentage-based (specific)
Figure 8.2: Administrative non-compliance penalty
SARS bases the calculation of this fixed-amount penalty on the taxpayer’s taxable income or
assessed loss for the preceding year. The amount of the penalty payable by an employer is set out in
Table 8.2.
Table 8.2: Fixed-amount penalties

1 2 3
Item Assessed loss or taxable income for preceding year Penalty
(i) Assessed loss R250
(ii) R0–R250 000 R250
(iii) R250 001–R500 000 R500
(iv) R500 001–R1 000 000 R1 000
(v) R1 000 001–R5 000 000 R2 000
(vi) R5 000 001–R10 000 000 R4 000
(vii) R10 000 001–R50 000 000 R8 000
(viii) Above R50 000 000 R16 000
The fixed-amount penalty increases monthly, calculated from one month after the penalty
assessment was issued by SARS, up to a maximum of 35 months (or 47 months, if SARS
does not have the taxpayer’s current address).
Currently, in practice, the only incidence of non-compliance that is subject to the fixed-
amount penalty is a natural person’s failure to submit an income tax return as and when
required, where the person has two or more outstanding income tax returns.
Percentage-based penalties are imposed under the TAA if SARS is satisfied that an amount of tax
was not paid as and when required under a tax Act. SARS may impose a penalty equal to the per-
centage, as prescribed in the relevant tax Act, of the amount of unpaid tax.
In terms of the Income Tax Act, the employer will have to pay a penalty equal to ten per cent of:
(a) the amount of employees’ tax that the employer fails to pay, as and when required under the Act;
or
(b) the total amount of employees’ tax deducted or withheld, or that should have been deducted or
withheld, by the employer from the remuneration of its employees, where the employer fails to
submit an employees’ tax return, as and when required under the Act.
The percentage-based penalty is charged under the TAA, but the percentage itself is
prescribed by the Income Tax Act.
If an employer fails to file a return (reconciliation), SARS can impose a percentage-based
penalty for each month that the employer fails to submit a complete return, which in total
may not exceed 10 per cent of the total amount of employees’ tax.
Income tax registration for employees

SARS provides employers who use e@syFile with the ability to either verify each employee’s current
income tax number, or to register employees who have not yet applied for an income tax number, for
a new number. This information is now mandatory on the IRP5/IT3(a).
IRP5/IT3(a) certificates
To prove that an employer has deducted employees’ tax from an employee’s remuneration, the
employer must issue each employee with an annual receipt known as an employees’ tax certificate
(IRP5/IT3(a)). The IRP5/IT3(a) certificate must show, amongst other details, the nature of the taxable
benefit, the cash equivalent of the value thereof, and the employees’ tax withheld. All records relating
to the IRP5/IT3(a) must be kept for five years. SARS regards failure by an employer to deliver an
employees’ tax certificate to one or more employees, as and when required under the Act, as a
criminal offence, liable on conviction to a fine or imprisonment of 12 months. Furthermore, SARS also
regards this as an act of non-compliance, which could be subject to the above-mentioned adminis-
trative non-compliance penalties in terms of the TAA.
An example of an IRP5/IT3(a) certificate appears in Figure 2.2, in chapter 2.
PAYE payments
Employee's tax is also referred to as pay-as-you-earn (PAYE). If an employee’s income is subject to
PAYE, this employee’s final tax liability will be determined when SARS processes the final income tax
return as submitted by this employee. Refer to chapter 2 for the rules governing when an individual,
in this case an employee, is required to submit an income tax return.
EMP501 reconciliations
The employer must also submit a bi-annual reconciliation (EMP501) (see Figure 8.3) to the local
SARS branch office. The purpose behind this reconciliation is to:
• reconcile the amount of employees’ tax declared and paid over to SARS with the tax reflected on
the IRP5 certificates issued for that tax year; and
• account for all issued, cancelled, lost or destroyed IRP5 certificates.
The form below is an example of the information required by the EMP501. These forms are no longer
available as the reconciliation process is a completely digital form and, as such, it is not download-
able from SARS – it needs to be filled in online.
(continued)
(continued)
Figure 8.3: An EMP501

SARS regards failure by an employer to submit a reconciliation of employees’ tax, as and when
required under the Act, as a criminal offence. On conviction, the employer will be liable to a fine or
imprisonment of 24 months. Furthermore, SARS also regards this as an act of non-compliance, which
could be subject to the aforementioned administrative non-compliance penalties in terms of the TAA.
Figure 8.4 depicts the annual employer reconciliation process with SARS' documents.
Figure 8.4: The SARS/employer reconciliation process

(http://www.sars.gov.za/TaxTypes/PAYE/Pages/Employer-Interim-Reconciliation.aspx)
Interest and penalties

SARS may impose interest at the prescribed rates, as well as a penalty equal to 10% of the outstand-
ing tax, on late payments or outstanding amounts. In terms of section 223 of the TAA, an understate-
ment penalty ranging from 0% to 200% may be imposed on the employer where the employer fails to
pay the relevant amount with the intention of evading his or her obligations as required in terms of the
relevant legislation. In addition, this could also be regarded as a criminal offence.
A criminal offence may be committed if a person does not comply with an obligation imposed under
a tax Act, and the Act contains a comprehensive list of these obligations. These offences are commit-
ted if the person performs or fails to perform an act wilfully and without just cause. If found guilty, the
taxpayer is subject to a fine or to imprisonment for a period up to two years. Examples pertaining to
employees’ tax include where the employer:
• does not deduct employees’ tax from remuneration or does not pay the tax to the Commissioner
within the required period;
• uses the employees’ tax amount for purposes other than payment to the Commissioner;
• does not comply with an income tax directive issued by the Commissioner;
• does not deliver IRP5/IT3(a) certificates to employees or former employees within the required
period;
• does not comply with the conditions for using a mechanised system (such as Pastel Payroll™) for
printing IRP5/IT3(a) certificates to be issued to employees or former employees;
• does not maintain a record of remuneration paid and tax deducted from it, or fails to retain such a
record for a period of five years from the date of the last entry therein;
• does not apply for registration as an employer;
• does not notify the Commissioner of a change of an address normally used by the Commissioner
for any correspondence with that taxpayer;
• does not notify the Commissioner that he or she has ceased to be an employer;
• does not comply with a written request for information from SARS; or
• defaults in handing in a return.
The TAA confers the power upon the Commissioner to publish details of taxpayers convicted of an
offense.
SARS levies various other levies and taxes based on payments made to employees, other than
employees’ tax (refer to chapter 9).
8.2.2 Calculation of employees’ tax

Employers must calculate employees’ tax on a monthly basis on the balance of remuneration (remu-
neration for employees’ tax purposes less any allowable deductions). Where an employee works for a
period that is less than a full tax year, the employer calculates the employees’ tax due on the annual
equivalent. The annual equivalent represents the remuneration actually received, but grossed up for
a full year. Although the annual tax is determined on the annual equivalent, the employer will calcu-
late the monthly tax as a pro-rata portion in order to determine the employees’ tax deductible on the
remuneration that the employee actually received or which accrued to the employee.
EXAMPLE 8.1
Required:
Calculate the employees’ tax payable by Mituba (Pty) Ltd (employer) in respect of Mr Tshabala (aged 34)
who is an employee of the company. Mr Tshabala worked for 7 months at this employer and received
R55 000 in total for this period. Mr Tshabala is not a member of a medical fund.
Solution
1. Calculate the annual equivalent: R55 000 ÷ 7 months × 12 months = R94 286
2. Tax on annual equivalent (using annual tax tables) = R94 286 × 18% = R16 971,43
3. Subtract the primary rebate (an annual amount): R16 971,43 – R13 635 = R3 336,43
4. Tax on R55 000 for 7 months worked: R3 336,43 ÷ 12 months × 7 months = R1 946,25.
Balance of remuneration
The employer is responsible for calculating the amount on which he or she will withhold employees’
tax. The employer will base this amount on remuneration received by the employee. This will include
(among other things) a salary, fee, bonus, wage, gratuity, pension, leave encashment, voluntary
award, commission, overtime payment and director’s remuneration. The following, among others, are
specifically included in remuneration:
• an amount, including a voluntary award, received or accrued in terms of a contract of employ-
ment or service;
• an amount received or accrued in respect of relinquishment, termination, loss, cancellation or
variation of an office, or employment, or of an appointment;
• a subsistence allowance, BUT only if the employee did not actually travel as required for this
allowance by the end of the month following the month in which he or she received the allowance
and failed to refund the employer;
• 80% of a travel allowance received (can be reduced to 20% if the employer is satisfied that at
least 80% of the use of the motor vehicle will be for business purposes);
• 80% of the taxable value of the right of use of a motor vehicle (can be reduced to 20% if the
employer is satisfied that at least 80% of the use of the motor vehicle will be for business pur-
poses); and
• fringe benefits (e.g. free or cheap services, medical and insurance payments made by an
employer for the benefit or on behalf of an employee; refer to chapter 6).
Any amount that the employer paid to the employee, where this amount is wholly in reimbursement of
expenditure actually incurred by the employee in the course of employment, is specifically excluded
from remuneration.
80% of a travel allowance is subject to employees’ tax. On assessment, however, when

the individual determines his or her final tax liability, 100% of the travel allowance is taxa-
ble. However, if the individual travelled for business purposes, he or she would be entitled
to claim a deduction for business travel expenses (refer to chapter 6).
In most cases, once the remuneration value has been determined, the employer should subtract the
following contributions (that the employee made during the tax year) from the remuneration value
in order to determine the ‘balance of remuneration’, which the employer will use for calculating
employees’ tax:
• retirement fund contributions (see chapter 3); and
• donations deducted from the employee’s remuneration and paid over by the employer on behalf
of the employee.
Thus, balance of remuneration = remuneration – allowed contributions.
The employer must deduct contributions made by the employee to any pension fund, provident fund
and/or retirement annuity fund that the employer is entitled or required to deduct from the employee's
remuneration.
Remember that the employer’s contribution is a taxable fringe benefit and a deemed
contribution in the hands of the employee.
The allowable deduction in the balance of remuneration calculation is the same as the
limits set out in chapter 3. The limit for the total retirement fund contributions is the lesser
of:
• R350 000; or
i remuneration (excluding any lump sum benefits); or
i taxable income before this deduction and donations to public benefit organisation
(including passive income and taxable capital gains, but excluding retirement and
withdrawal lump-sum benefits);
• taxable income before allowing this deduction and the inclusion of any taxable capital
gain.
The employer must also deduct any donation that the employer made on behalf of an employee, if:
• the donation does not exceed 5% of the remuneration remaining after deducting the retirement
fund contributions; and
• a section 18A receipt has been issued to the employer (i.e. an approved public benefit organisa-
tion has issued the receipt).
Do not confuse the donation deduction calculated by the employer (the 5% limit) with the
deduction calculated by the employee in his/her own taxable income caculcation (the
10% limit).
After the balance of remuneration has been calculated, the annual equivalent should then be de-
termined. The annual equivalent means that you need to convert the balance of remuneration for the
period into what it would be if it was earned for a full year (Balance of remuneration ÷ number of
months × 12 months). The annual equivalent is then used to calculate the tax per the individual's
2018 tax table. The tax is reduced by the personal and medical tax rebates. As discussed in chap-
ter 2, the first rebate, the medical scheme fees tax credit, is available to an individual who is a mem-
ber of a medical scheme, regardless of his or her age.
The additional medical expenses tax credit can also be used in the employees’ tax calculation, but
only for taxpayers aged 65 or older.
The two medical tax credits are rebates and will reduce the amount of employees’ tax
calculated, not the balance of remuneration.
EXAMPLE 8.2
Required:
Calculate the amount of employees’ tax that WorkIt Ltd must withhold in respect of February 2018.
Ms Spears (aged 32) is in the full-time employment of WorkIt Ltd. She is unmarried and has no dependants.
She receives a monthly salary of R30 000. Ms Spears makes monthly contributions of R2 000 to a pension
fund and R500 to a medical aid. The employer also contributes R1 000 per month to the medical aid on
behalf of Ms Spears. WorkIt donated R1 800 to a local public benefit organisation on behalf of Ms Spears on
2 February 2018. This amount was deducted from her salary and a section 18A receipt was issued.
Solution
R
Salary 30 000
Fringe benefit (employer medical aid contributions on behalf of employee) 1 000
Remuneration 31 000
Less: Retirement fund contributions
Contributions of R2 000, limited to the lesser of:
• R350 000/12 = R29 166,67 (for one month); or
i remuneration = R31 000
i taxable income = R31 000
i thus: 27,5% × R31 000 = R8 525
• R31 000 (taxable income before this deduction and any capital gain).
The limit is the lesser of R29 166,67, R8 525 or R31 000, thus R8 525. The total retirement
contribution of R2 000 is therefore deductible. (2 000)
Balance 29 000
Less: Donation to a PBO (R1 800, limited to R29 000 × 5%) (1 450)
BALANCE OF REMUNERATION 27 550
Annual equivalent (R27 550/1 month × 12 months) 330 600
Normal tax per the individual’s tax table 72 469
(R330 600 – R296 540) × 31% + R61 910
Less: Medical scheme fees tax credit (R303 × 12) (3 636)
Note: The additional medical expenses tax credit is not applicable for employees tax, as
Ms Spears is younger than 65.
Employees’ tax for the year 55 198
Employees’ tax for February 2018 (R55 198 ÷ 12) 4 600
8.2.3 Payment of employees’ tax

Employees’ tax must be paid over to SARS on a monthly basis, on/before the 7th of the month follow-
ing the month for which the employees’ tax contributions are applicable. Employees’ tax contributions
are submitted along with SDL and UIF contributions (refer to chapter 9) on the EMP201 form. Where
the 7th of the month falls on a Saturday, Sunday or public holiday, the payment must be made not
later than the last business day before such day.
If an employer fails to deduct or withhold the full amount of employees’ tax, the employee
is personally liable for the shortfall.
As discussed above, an employer has to deduct employees’ tax from remuneration paid to an em-
ployee. The payment of employees’ tax is a pre-payment of the tax liability of an individual (an em-
ployee) to SARS, and the individual must, therefore, deduct the amount of employees’ tax already
paid during the year from his or her final tax liability (a person cannot pay tax twice on the same
amount). This applies equally to provisional tax (refer to paragraph 8.3).
8.2.4 Employment tax incentive

An employment tax incentive (ETI) was introduced on 1 January 2014 to encourage employers to hire
young and less experienced work-seekers. The idea was to address the high unemployment rate
amongst young and unskilled people and, in so doing, to boost the economy. The ETI reduces the
monthly employees’ tax payable by so-called ‘eligible employers’ and will apply to all ‘qualifying
employees’ who are hired on or after 1 October 2013. The ETI was recently extended until 28 Febru-
ary 2019. After the expiration date, any ETI amounts not deducted from PAYE will be forfeited or lost.
A simple example of how the ETI works: If an employer is registered for PAYE and em-
ploys a young person for a full month for R2 000 per month, an employer will get R1 000
off his/her monthly PAYE liability if all other qualifying requirements are met.
Who qualifies for the ETI

The employer is eligible to receive the ETI if the employer:
• is registered for PAYE or is eligible to register for PAYE (the employer can’t register for PAYE just
to claim the ETI);
• is not a national, provincial or local sphere of government;
• is not a public entity listed in Schedule 1 or 2 of the Public Finance Management Act;
• is not a municipal entity; and
• is not disqualified by the Minister of Finance due to the displacement of an employee or by not
meeting the conditions as prescribed by the Minister by regulation.
A ‘qualifying employee’ is an individual who:
• has a valid South African ID, asylum seeker permit or an ID issued in terms of the Refugee Act;
• is 18 to 29 years of age (exceptions to this are if the employer operates in a special economic
zone or if the employer operates in an industry designated by the Minister of Finance);
• was employed by the employer or an associated person to the employer on or after 1 October
2013;; and
• earns at least the minimum wage applicable to that employer or if a minimum wage doesn’t
apply, is paid a wage of at least R2 000 for a full month (employed for 160 hours in a month)..
The employee will not qualify if he/she is:
• a domestic worker;
• a ‘connected person’ to the employer;; or
• earns remuneration of R6 000 or more during the month..
If an employee worked less than 160 hours in the month, the remuneration amount to be
used in the calculation of the EIT (see below) must be ‘grossed up’ to 160 hours per
month to calculate the value of the ETI. This amount is then ‘grossed down’ in the same
ratio
EXAMPLE 8.3
Required:
Calculate the amount of the remuneration that must be used to claim the ETI for the month:
Hours employed Total remuneration

Part Employee
in month paid ETI remuneration?
A Mr Shabalala 80 R4 000
Solution
Part A
As the qualifying employee worked for 80 hours in the month, the remuneration amount needs to be ‘grossed
up’ to 160 hours to check if the amount falls within the wage requirements.
Step 1: Gross up hours

160/80 = 2
Step 2: Determine the monthly remuneration on grossed up hours

R1 500 × 2 = R3 000
This falls within the ETI remuneration limits and the employee would qualify for the ETI.
Calculation of the ETI

The employer can claim the incentive for a 24-month period for all qualifying employees. The amount
of the incentive depends on the salary paid to each employee. The following four steps must be
followed monthly to calculate the ETI:
1. Identify all qualifying employees for the month.
2. Work out the applicable employment period for each qualifying employee.
3. Work out each employee’s ‘monthly remuneration’.
4. Calculate the amount of the incentive per qualifying employee as per the Table 8.3.
Table 8.3: Employment Tax Incentive calculation
Monthly Employment Tax Incentive per month Employment Tax Incentive per month
Remuneration during the first 12 months of during the next 12 months of
employment of the qualifying employee employment of the qualifying employee
R0–R2 000 50% of monthly remuneration 25% of monthly remuneration
R2 001–R4 000 R1 000 R500
R4 001–R6 000 Formula: Formula:
R1 000 – (0,5 × (Monthly remuneration R500 – (0,25 × (Monthly remuneration
– R4 000)) – R4 000))
Step 1: Take the monthly remuneration Step 1: Take the monthly remuneration
and subtract R4 000. and subtract R4 000.
Step 2: Take the result in Step 1 and Step 2: Take the result in Step 1 and take
halve the number. a quarter of the number.
Step 3: Take R1 000 and subtract the Step 3: Take R500 and subtract the
amount calculated in Step 2. amount calculated in Step 2.
R6 001 and above Rnil Rnil
The definition of ‘monthly remuneration’ takes into account the number of hours for which an eligible
employee is employed. If the eligible employee was employed:
• for more than 160 hours in a month: monthly remuneration = amount paid in a month; or
• for 160 hours or fewer in a month: ETI = calculation above × hours employed/160.
An employer cannot deduct more than the total employees’ tax which is due in a specific
month. In such a case, the ETI is rolled over to the next month. At the end of each employ-
ees’ tax reconciliation period (i.e. 1 March to 31 August and 1 September to 28/29 Febru-
ary), the employer can claim a reimbursement/refund of the excess ETI. The refund can
only be claimed if the employer submits an EMP501 declaration at the end of each recon-
ciliation period and is tax compliant.
EXAMPLE 8.4
Required:
Calculate the employment tax incentive in respect of March 2017.
Information:
Mr Seeka (aged 22) is employed by a qualifying employer on 1 March 2017. He earns a basic salary of
R5 500 per month and is a qualifying employee who has worked for more than 160 hours in March.
Solution
J Mr Seeka’s remuneration falls in the R4 001– R6 000 bracket. As this is his first month of employment, the
ETI for the ‘first 12 months’ must be calculated.
J The formula applies: R1 000 – (0,5 × (Monthly remuneration – R4 000))
J Step 1 = R5 500 – R4 000 = R1 500
J Step 2 = 0,5 × R1 500 = R750
J Step 3 = R1 000 – R750 = R250
The ETI in respect of March 2017 amounts to R250 and will be used to reduce the employer’s employees’ tax
liability.
It must be noted that the ETI will not be allowed to be claimed if the employer is not tax
compliant – that is, all the employer’s tax returns and outstanding tax liabilities have been
paid.
Furthermore, it is important to remember that the ETI does not have an effect at all on the
individual (the employee) – i.e. the individual does not receive anything additional (such
as cash back or an increased salary), it is only the employer that gets a reduction of the
employees’ tax that it needs to pay to SARS on a monthly basis.
EXAMPLE 8.5
Required:
For each of the following qualifying employees, calculate the amount of the ETI:
Hours employed Total monthly ETI First 12 ETI Second 12

Part Employee
in month remuneration months months
A Mr Shabalala 160 R4 000 ? ?
B Ms Van Zyl 160 R2 500 ? ?
C Mr Chenza 160 R6 500 ? ?
(continued)
Solution
Part A
As the qualifying employee worked for 160 hours in the month, the remuneration amount does not need to be
‘grossed up’. The full monthly remuneration amount is R4 000 and thus the ETI amount that the employer can
use in the first 12 months of employment is R1 000. The ETI that the employer can use in the second
12 months is R500. These amounts are calculated as follows:
First 12 months:
Formula: R1 000 – (0,5 × (R4 000 – R4 000)) = R1 000 per month
Second 12 months:
Formula: R500 – (0,25 × (R4 000 – R4 000)) = R500 per month
Part B
‘grossed up’. The full monthly remuneration amount is R2 500 and thus the ETI amount that the employer can
use in the first 12 months of employment is R1 000. The ETI that the employer can use in the second
12 months is R500.
Part C
‘grossed up’. The full monthly remuneration amount is above R6 000 so the employee does not qualify for the
ETI and the employer will need to pay the full PAYE amount to SARS.
For more information on how the ETI is calculated, (step for step) go to:
http://www.sars.gov.za/TaxTypes/PAYE/ETI/Pages/The-Employment-Tax-Incentive-(ETI)-Calculations-
Explained.aspx.
ETI refund process

The amount of ETI allowable decreases the amount of PAYE that is payable by an employer or an ETI
refund can be paid. The information relating to the ETI is included on the EMP201 as follows:
Figure 8.5: The EMP201 form containing the ETI information

The employer must also submit an EMP501 declaration at the end of each six-month reconciliation
period to claim a refund of the ETI (if applicable). The ETI refund for each reconciliation period will
only be paid if the employer is tax compliant – meaning that all tax returns have been submitted and
there is no outstanding tax debt.
On submission of the EMP501 for the end of the reconciliation period, all credits not used are refund-
ed as they can’t be carried forward. No action is required from the employer if the employer is tax
compliant and the bank account details are in order.
If the employer is not tax compliant at the end of the 6-month cycle, the excess amount will be reim-
bursed when the employer becomes tax compliant. If the employer fails to be tax compliant within the
next six months, the excess amount will be permanently lost.
8.3 Provisional tax

An individual who earns taxable income that is not remuneration (i.e. income not subject to deduc-
tion of PAYE, e.g. interest, rental or business income), must pay provisional tax on this income. Provi-
sional tax is not a separate tax, but another mechanism or way for SARS to collect tax from taxpayers
during the year instead of only at the end of the year.
Provisional tax helps taxpayers to provide for their final tax liability by paying at least two amounts
during the course of the year (effectively, it is a pre-payment of tax). The final tax liability is, however,
only determined on assessment. The payment of provisional tax will prevent large amounts of tax
being due by an individual on assessment, as SARS spreads the tax load over the year.
Provisional tax is declared to SARS on an IRP6. SARS does not send out IRP6 returns to provisional
taxpayers, as the majority of provisional tax-payers make their submissions electronically. The pre-
populated provisional tax forms can be requested, captured and submitted via various channels, i.e.
by:
• registering for eFiling (refer to chapter 2);
• logging on to SARS eFiling and adding provisional tax to an existing profile to access and file an
IRP6 return online;
• visiting a SARS branch office; or
• calling the SARS Contact Centre.
Over and above the two payments, there is also a voluntary third payment (top-up), which is due
seven months after the end of the tax year (i.e. on/before 30 September). The reason for this third
payment is to avoid interest on any underpayment of tax on assessment. Currently, a taxpayer whose
taxable income is less than R50 000 will pay no interest. SARS does not issue returns for the third
payment and a taxpayer wishing to make a third voluntary payment can do so via eFiling.
Figure 8.6: An example IRP6
Exempt from provisional tax

A taxpayer may be exempt from the provisional tax system under certain circumstances. This does
not, however, mean that the person is exempt from paying income tax. Previously, the exemption
requirements were determined by the taxpayer’s age. However, from 1 March 2015, no distinction is
made between those under or over 65 years of age.
For the 2018 year of assessment, a natural person will be exempt from paying provisional tax if the
person does not earn (derive) income from carrying on a business and one of the following two
criteria is met:
• the taxable income does not exceed (is less than) the tax threshold (under 65 = R75 750; 65 to
74 = R117 300 and over 75 = R131 150); or
• the taxable income from interest, dividends, foreign dividends and rental from the letting of fixed
property does not exceed (is less than) R30 000.
The exemption requirement refers to the carrying on of a business, and not a trade.
Although the term ‘business’ is not defined in the Act, it is included in the definition of
‘trade’. The term ‘trade’ is thus more broadly defined than a ‘business’ and can include
passive activities, such as the letting of property. The carrying on of a business supposes
a more active approach and direct involvement by the taxpayer.
8.3.1 Calculation of provisional tax

A taxpayer completes a provisional tax return by estimating the total taxable income for the applica-
ble year of assessment. The taxable income includes income from employment, business income,
investment income and rental income.
First payment (annually on 31 August for individuals)

The taxpayer will base the first payment on an estimate of the current year’s taxable income, but this
estimate cannot be less than the “basic amount”, unless the Commissioner, having regard to the
circumstances of the case, agrees to accept a lower amount. The basic amount represents the
taxable income for a full year. It is based on the taxable income (excluding any capital gain or lump
sums from retirement or withdrawal benefits) of the latest year for which SARS assessed the taxpayer.
SARS includes this amount on the IRP6 that is accessible on eFiling.
Where the last year that has been assessed by SARS is not the previous year of assessment and it
means that the estimate must be made more than 18 months after the end of that year (the last year
assessed), the basic amount must be increased by an amount equal to eight per cent (8%) per
annum of that amount, from the end of such year to the end of the year of assessment in respect of
which the estimate is made
If SARS issued the ITA34 (notice of assessment) for the latest year assessed within 14 days from the
payment date for the provisional tax, the taxpayer has to use the assessment of the preceding year. If
both requirements are met (see below), the taxpayer must increase the taxable income of the pre-
ceding year’s assessment by 8% per annum in order to calculate the basic amount. If the ITA34 was
received beyond the 14-day cut-off date, the assessment may be used as is, i.e. without increasing it
by 8%.
Basically, the 8% increase will only come into play if the estimate is more than 18 months
after the end of the last year assessed. Note that the 8% increase is not a compounded
rate. Refer to Example 8.6.
The 18-month test can be quite tricky. It is therefore advisable to draw a timeline and compare the
various dates in question. The timeline should stretch to the latest preceding year of assessment,
which, by way of example in Figure 8.6, is the 2017 year of assessment. Also note that the require-
ment is ‘more than’. Therefore, if a period ends exactly 18 months after the specific date, the require-
ment is not met, as it is not more than 18 months.
29 Feb 2016 28 Feb 2017 1st estimate: 28 Feb 2018

31 Aug 2017
18-month rule
18-month rule: compare 31 August 2017 with the end of the last preceding year assessed, i.e. 28 February
2017, or 29 February 2016, etc.
Figure 8.7: Applying the requirements for increasing the basic amount
EXAMPLE 8.6
Required:
Determine whether the basic amount will be increased in respect of the 18-month rule for the taxpayer’s first
provisional tax payment in respect of the 2018 year of assessment.
Information:
The notice of assessment (ITA34) for the 2017 tax year of assessment was issued on 15 August 2017.
The notice of assessment (ITA34) for the 2016 tax year of assessment was issued on 1 February 2017.
Solution
• The deadline for submitting the 2018 first provisional tax return is 31 August 2017.
• The 2017 year of assessment was issued 16 days prior to the submission of the provisional tax estimate.
Since this meets the 14-day criterion, the latest assessed preceding year is the 2017 tax year.
• The estimate is not made more than 18 months after the end of the latest preceding year.
Æ Compare 31 August 2017 with 28 February 2017.
• Therefore, the basic amount increase of 8% will not be taken into account when determining the basic
amount for the first provisional payment for 2018.
EXAMPLE 8.7
Required:
Information:
The notice of assessment for the 2017 tax year assessment was issued on 19 August 2017.
The notice of assessment for the 2016 tax year of assessment was issued on 1 February 2017.
Solution
• The 2017 year of assessment was issued 12 days prior to the date on which the provisional tax estimate
was submitted. Therefore, as the 2017 assessment does not meet the 14-day criterion, the latest assessed
preceding year of assessment is the 2016 tax year of assessment.
• The estimate is not made more than 18 months after the end of the latest preceding year.
Æ Compare 31 August 2017 with 29 February 2016 (exactly 18 months).
• Therefore, the basic amount increase of 8% will not be applied.
EXAMPLE 8.8
Required:
Information:
The notice of assessment for the 2017 tax year assessment was issued on 25 August 2017.
The notice of assessment for the 2016 tax year of assessment has not been issued yet.
The notice of assessment for the 2015 year of assessment was issued on 1 January 2016, indicating a tax-
able income amount of R100 000.
Solution
• The 2017 year of assessment was issued 6 days prior to the date on which the provisional tax estimate
was submitted. Therefore, as the 2017 assessment does not meet the 14-day criterion. As the 2016 year
of assessment had not been issued yet, the latest assessed preceding year of assessment is the 2015
tax year of assessment.
• The estimate is made more than 18 months after the end of the latest preceding year.
Æ Compare 31 August 2017 with 28 February 2015.
• Therefore, the basic amount increase of 8% will apply.
• The 2015 taxable income will increase by 24% in total (i.e. 8% for each of 2015, 2016 and 2017).
• Basic amount = R100 000 + (R100 000 × 8%) + (R100 000 × 8%) + (R100 000 × 8%) = R124 000
Once the taxpayer has determined the correct estimate to use (i.e. an amount not less than the basic
amount, unless approved by the Commissioner), he or she will use this selected amount for calcu-
lating his or her normal tax payable. As the first payment is only due six months into the tax year, the
taxpayer will use 50% of the normal tax payable to represent half of the total tax payable for the full
year. The taxpayer may then reduce this amount by the actual employees’ tax that his or her employer
deducted for the first six months of the year of assessment.
The first payment, therefore, is calculated as follows:
Total estimated tax for the full year (per tables)

Less: Rebates
× 50% (as it is only for half a year)
Less: Actual employees’ tax paid for half a year
Second payment (annually on 28/29 February)

The taxpayer will base the second payment on an estimate of the taxable income for the year of
assessment. Unlike the first payment estimate, the estimate for the second payment may be less than
the “basic amount” and no approval from the Commissioner is necessary. Thus the taxpayer is free to
determine that the second period estimate is equal to the basic amount for the second period or
another amount which is more or less than the basic amount, but it should be equal to the total liabil-
ity for the year of assessment. Should the total estimated liability for the year of assessment fall below
a certain amount (called the ‘safe haven’ amount – refer to paragraph 8.3.2), SARS may levy addi-
tional tax.
The second payment, therefore, is calculated as follows:
The total estimated tax for the full year

Less: Rebates
Less: The employees’ tax paid for the full year
Less: The amount of tax paid for the first period
It is important to note that if the estimate in respect of the second provisional tax payment is not
submitted by the last day of a period of four months after the last day of the year of assessment, the
provisional taxpayer is deemed to have submitted an estimate of Rnil. For example, if the provisional
taxpayer has not submitted his/her second provisional tax payment by 30 June of a year, then he/she
is deemed to have submitted a Rnil estimate.
Third payment (annually on 30 September, but only if necessary)

The taxpayer will base this payment on actual taxable income, as the purpose of this payment is to
enable the taxpayer to pay the difference between the full tax liability for the tax year and the
employees’ tax plus provisional tax already paid for the same year.
The third payment, therefore, is calculated as follows:
The total tax payable for the full year

Less: Rebates
Less: The employees’ tax paid for the full year
Less: The amount of tax paid for the first period
Less: The amount of tax paid for the second period
EXAMPLE 8.9
Required:
Calculate the amounts due by Sonny for the current year of assessment in respect of the:
1. first provisional tax payment;
2. second provisional tax payment; and
3. third provisional tax payment (if applicable).
Indicate the due dates for these payments.
Information:
Sonny Cher, 42 years old, registered with SARS as a provisional taxpayer. He requested the assistance of a
tax practitioner to assist him in postponing the payment of his normal tax liability for the current year of
assessment for as long as possible without taking the risk of incurring any additional tax, penalties or interest.
Sonny is not a member of a medical fund and did not have any medical expenses for the first half of the year.
He supplied the following information:
R
Estimated taxable income for the 2018 tax year – as on 31 August 2017 285 000
Estimated taxable income for the 2018 tax year – as on 28 February 2018 273 000
Employees’ tax deducted for the 2018 year of assessment (by 31 August 2017 R15 193
had been deducted as employees tax) 30 385
Actual taxable income determined on 15 August 2018 290 000
His taxable income for the 2017 tax year, as assessed on 15 May 2017, was R263 000.
(continued)
Solution
1. Calculation of first provisional tax payment
R
Payable on/before 31 August 2017
Estimated taxable income: R285 000
But this should not be less than the basic amount (unless the Commissioner approves the
estimate). Thus he needs to determine what the basic amount is.
Basic amount: use the latest assessed amount (2017) as is, because it was received more than
14 days before the payment date of 31 August 2017. Furthermore, the estimate is not made
more than 18 months after the end of the latest preceding year (28 February 2017–31 August
2017). Thus the basic amount is R263 000.
As the basic amount is less than the estimated taxable income, it would be more beneficial for
the taxpayer to use the basic amount. Remember, they may not use an estimate that is less than
the basic amount without approval from the Commissioner. 263 000
Normal tax on R263 000 (as per 2018 tax table)
(R263 000 – R189 880) × 26% + R34 178 53 189
Net normal tax for the year of assessment 39 554
Half of R39 840 19 777
Less: Actual employees’ tax paid (R30 385 × 50%) (15 193)
Provisional tax payable 4 584
2. Calculation of second provisional tax payment

R
Payable on/before 28 February 2018
Estimated taxable income 273 000
Although one is allowed to use the basic amount, it is better to make an estimate of the taxable
income for the 2018 year of assessment in order to avoid penalties and interest (see next sec-
tion 8.3.2).
Normal tax (as per 2018 tax table)
(R273 000 – R189 880) × 26% + R34 178 55 789
Net normal tax for the year of assessment 42 154
Less: Actual employees’ tax paid for the year of assessment (30 385)
Less: First payment (as calculated above) (4 584)
3. Calculation of third provisional tax payment

Payable on/before 30 September 2018
Based on actual income of R290 000
Normal tax on R290 000 (as per 2018 tax table)
(R290 000 – R189 880) × 26% + R34 178 60 209
46 574
Less: Actual employees’ tax paid for the year of assessment (30 385)
Less: First provisional tax payment (4 584)
Less: Second provisional tax payment (7 185)
The provisional tax estimates will not result in a refund from SARS. Accordingly, if the final
answer in calculating the first, second or third payments is negative, the amount is limited
to Rnil.
8.3.2 Additional tax, interest and penalties

Additional tax – underestimate of second payment
Refer to the discussion in paragraph 8.2.1 regarding the TAA penalties. SARS may levy an adminis-
trative non-compliance penalty if the taxpayer:
• does not submit the income tax return on time;
• does not disclose all his or her income on the income tax return; and/or
• makes a false statement or declaration on the income tax return.
SARS may also levy additional tax amounting to 20% of the provisional tax payable (after rebates) if
the estimate used for the second provisional tax payment is less than the ‘safe haven’ amount. This
‘safe haven’ amount varies depending on the provisional taxpayer’s taxable income.
‘Safe haven’ for individuals with taxable income of R1 million or less

(Tier 1 taxpayers)
Should the individual’s taxable income for the current year of assessment be less than R1 million, the
20% additional tax will NOT be payable if the estimated taxable income used for the second pro-
visional payment is equal to the lower of:
• the basic amount; or
• 90% of the actual taxable income for the year of assessment.
Should the estimate used be lower than both these amounts, SARS will levy an automatic penalty of
20% additional tax on the ‘shortfall’. The taxpayer may approach SARS for a full or partial reduction of
the penalty if the estimate was seriously calculated and not deliberately or negligently understated.
The shortfall is the difference between what the taxpayer should have paid, and what he or she did
pay. The amount that should have been paid, is calculated as the lesser of:
• normal tax on 90% of actual taxable income; or
• normal tax on the basic amount.
The amount that the taxpayer did pay during the year, is the total of employees’ and provisional tax
payments made. See example 8.8 below.
The amount of the normal tax payable for the year of assessment is determined after
taking into account the personal rebates and medical tax credits.
‘Safe haven’ for individuals with taxable income of more than R1 million
(Tier 2 taxpayers)
Should the individual’s taxable income for the current year of assessment be more than R1 million,
the 20% additional tax will NOT be payable if the estimated taxable income used for the second
provisional payment is at least equal to:
• 80% of the actual taxable income for the year of assessment.
Should the estimate used be lower than this amount, SARS may impose the 20% additional tax on the
shortfall if it is not satisfied that the estimate was seriously calculated or not deliberately or negligently
understated. Therefore, this additional tax is discretionary.
The additional tax is only in respect of an underestimation of the second provisional

payment. No additional tax may be levied by SARS on the first period’s estimate.
Interest
SARS may charge interest at the prescribed rate if:
• provisional tax paid in respect of a year of assessment is not sufficient to offset the taxpayer’s
assessed final income tax liability in full; and/or
• provisional tax is not paid on time.
The Minister of Finance determines this prescribed rate of interest from time to time.
Penalties
If the second payment estimate was submitted late or the payment of provisional tax was not made
on time, SARS may charge additional penalties. However, from 1 March 2015, the penalty for a late
estimation has been deleted. This was done to align the provisional tax system with the TAA, so that
a taxpayer does not end up paying two penalties for the same offence.
If the taxpayer failed to make the first or second provisional payments on time (or at all), SARS must
impose a ten per cent penalty on the amount not paid. This is considered a percentage based
penalty under the TAA. Again, some relief has been granted by SARS. From 1 March 2015, if both
additional tax (on an underestimate) and a late payment penalty were levied, the additional tax will be
reduced by the amount of the late payment penalty. For example, if additional tax of R10 000 and a
late payment penalty of R8 000 were charged by SARS, the additional tax will be reduced to R2 000.
Two penalties are potentially levied in respect of the second period, namely:
• a penalty for the late payment of provisional tax; and
• a penalty for the underpayment of provisional tax as a result of underestimation.
EXAMPLE 8.10
Required:
Calculate the additional tax that SARS must levy in respect of Al Pacino’s underestimation of his second pro-
visional tax payment for the 2018 year of assessment. You may assume that SARS will not remit the penalty.
Information:
Al is a 57-year-old provisional taxpayer. He is unmarried, not a member of a medical scheme and has in-
curred no qualifying medical expenses.
Al’s basic amount, based on the notice of assessment for the 2017 year of assessment, was R300 000.
Because of the economic downturn, Al based his first and second provisional estimates on taxable income of
R200 000 for the year. He had obtained the Commissioner’s permission to do so.
Al’s actual taxable income for the 2018 year of assessment amounted to R280 000.
No employees’ tax was paid during the year. Al paid provisional tax during the 2018 year of assessment of
R24 191.
(continued)
Solution
• Al Pacino is a Tier 1 taxpayer, as his actual taxable income is less than R1 million.
• Al’s estimate for the second period was R200 000. This is less than both
i the basic amount of R300 000; and
i 90% of actual taxable income of R280 000 = R252 000.
• Al is therefore liable for 20% additional tax.
• The amount that Al should have paid is the lesser of:
i Normal tax on 90% of the actual taxable income = R36 694
Tax per the 2018 table on R252 000 R50 329
Less: Primary rebate (R13 635)
Normal tax R36 694
Or
i Normal tax on the basic amount = R49 348
Tax per the 2018 table on R300 000 R62 982
Less: Primary rebate (R13 635)
Normal tax R49 348
The amount Al should have paid is R36 694.
• The amount that Al did pay is R24 191.

• The shortfall is R36 694 less R24 191 = R12 503.
• The penalty is 20% × R12 503 = R2 501.
8.4 Summary
An individual has to pay tax on all the income that he or she earns, subject to certain exemptions,
deductions and allowances. After determining the taxable income of the individual, his or her tax
liability needs to be calculated. This is usually finalised at the end of the tax year. However, the
taxpayer may pre-pay part of the taxes due, sometimes on a monthly or six-monthly basis. This is
usually the case if the individual is an employee and/or earns income other than remuneration.
An employer usually pays an employee a monthly salary, from which the employer is required to
withhold a tax called employees’ tax. The employer then has to pay this employees’ tax to SARS. At
the end of the tax year, the employee should receive an IRP5/IT3(a) certificate proving that his or her
employer has withheld and paid over the employees’ tax due to SARS. This certificate contains all the
detail regarding income that the employer paid to the employee, as well as the tax that the employer
deducted from this income. The employee will use this information to complete his or her tax return
and to calculate the final tax liability.
An individual who earns income other than remuneration is also required to pay provisional tax on this
additional income that SARS has not yet taxed. Provisional tax is payable twice a year (every six
months), but should the amount of provisional tax paid during the year not be sufficient, the taxpayer
can make a third voluntary provisional payment in order to avoid interest being levied on the under-
payment.

1. What should an employee receive from his or her employer at the end of each month?
2. Name the tax deductions that can reduce a person’s remuneration for employees’ tax purposes.
3. What certificate will an employee receive from his or her employer at the end of each tax year,
and what information will be shown on this certificate?
4. What is provisional tax?
5. Calculate (on assessment) the tax payable by or refundable to a 33-year-old employee who
received the following during the 2018 tax year:
Salary R120 000
Overtime R8 000
Bonus R10 000
Interest (SA banks) – not a tax-free investment account R21 000
Dividends from foreign companies (assume it is fully exempt) R3 500
The employee contributed R9 000 to a pension fund. The employer deducted employees’ tax of
R9 800 during the year.
The taxpayer is not a member of a medical aid.
6. Indicate which of the following amounts are subject to employees’ tax and, if so, the amount on
which the employees’ tax is calculated:
(a) An annuity of R5 000 per month paid to a former employee by his former employer.
(b) R124 000 p.a. paid to a domestic servant.
(c) A travel allowance of R3 000 per month paid to an employee.
(d) An amount of R30 000 paid by an individual to his auditors for bookkeeping services in
respect of his own business.
7. Mrs Frankly (aged 67) is a widow and has no dependants. She is retired, but because her invest-
ment income exceeds the threshold, she is a provisional taxpayer. In August 2018 she calculated
that her actual taxable income in respect of the 2018 year of assessment was R700 000. She
contributes R4 000 per month to a medical aid. She had paid for qualifying medical expenses to
the amount of R15 000 (not refunded by the medical aid).
Her first provisional tax payment amounted to R47 800 and her second provisional tax payment
to R105 900. Mrs Frankly wants to avoid all penalties and interest and wants to make a third pro-
visional tax payment for the 2018 year of assessment.
Calculate Mrs Frankly’s third provisional tax payment and indicate its due date.
Answers
CHAPTER
9 Other Taxes
Author: S Smulders
Contents
Page
9.1 Introduction ........................................................................................................................... 232
9.2 Value-added tax .................................................................................................................... 233
9.2.1 Registration ............................................................................................................... 234
9.2.2 The accounting basis ............................................................................................... 244
9.2.3 Administration ........................................................................................................... 245
9.2.4 Calculating VAT ........................................................................................................ 254
9.2.5 Output tax ................................................................................................................. 255
9.2.6 Time of supply .......................................................................................................... 260
9.2.7 Value of supply ......................................................................................................... 260
9.2.8 Input tax .................................................................................................................... 261
9.2.9 VAT and income tax.................................................................................................. 263
9.3 Employee-related taxes and levies ....................................................................................... 264
9.3.1 Employees’ tax .......................................................................................................... 264
9.3.2 Skills development levy ............................................................................................ 265
9.3.3 The Unemployment Insurance Fund ........................................................................ 265
9.3.4 Compensation Fund for Occupational Injuries and Diseases.................................. 268
9.4 Customs and excise duty ..................................................................................................... 273
9.4.1 Duties ........................................................................................................................ 274
9.4.2 VAT on imported goods ............................................................................................ 276
9.4.3 Customs value .......................................................................................................... 277
9.4.4 Arrival of goods in South Africa ................................................................................ 277
9.4.5 Customs declaration ................................................................................................. 278
9.4.6 Goods not subject to customs .................................................................................. 278
9.4.7 Customs offences ..................................................................................................... 280
9.5 Other taxes and levies .......................................................................................................... 281
9.5.1 Transfer duty ............................................................................................................. 281
9.5.2 Securities transfer tax ............................................................................................... 283
9.5.3 Turnover tax .............................................................................................................. 283
9.5.4 Proposed health promotion levy (sugar tax) ............................................................ 288
9.6 Summary ............................................................................................................................... 289
231

9 understand when a person is required to register for value-added tax (VAT).
9 explain the different accounting bases for VAT.
9 list the requirements of a tax invoice where the supply exceeds R5 000.
9 list the requirements of a tax invoice where the supply does not exceed R5 000.
9 list the requirements for debit and credit notes.
9 calculate VAT payable to SARS.
9 list the zero-rated and exempt supplies.
9 understand the interaction between the Income Tax Act 58 of 1962 (as amended) (the Income
Tax Act) and the Value-Added Tax Act 89 of 1991 (the VAT Act).
9 list and understand the employee-related taxes, levies and incentives.
9 understand and explain customs and excise duties.
9 understand and explain transfer duty.
9 understand and explain securities transfer tax (STT) and know when it became applicable.
9 understand and explain turnover tax.
9 be aware of the proposed sugar tax.
9.1 Introduction
Until now, this book has examined and discussed income tax and capital transfer taxes, and the
effect that they have on an individual. In this chapter, the focus will be on certain other taxes that an
individual needs to know about, especially if this individual plans to start a business to supplement a
salary or to earn income because of unemployment, or where the individual’s hobby grows into a
business.
The South African Revenue Service (SARS) calculates income tax for a business on the
same principles as for an individual: ‘gross income’ less general deductions less specific
deductions equals taxable income. There are, however, many additional specific deduc-
tions that apply to a business.
This chapter will not look at all the specific deductions that a business can deduct for income tax
purposes. However, it will look at the consequences of other taxes and levies that will affect the run-
ning of a small business, i.e. VAT, employee-related taxes and levies (such as the skills development
levy (SDL) and contributions to the Unemployment Insurance Fund (UIF)) and Compensation Fund
for Occupational Injuries and Diseases, customs and excise duties, transfer duty, securities transfer
tax, turnover tax and the proposed sugar tax.

J Value-added tax J Customs duty
J Employees’ tax J Excise duty
J Skills development levy J Transfer duty
J Unemployment Insurance Fund contributions J Securities transfer tax
J Employment Tax Incentive J Proposed health promotion levy (sugar tax)
J Compensation Fund for Occupational Injuries
and Diseases (COID)
J Turnover tax
Chapter 9: Other Taxes 233
9.2 Value-added tax

VAT is an indirect tax, based on consumption. This is different to income tax that is a direct tax levied
on a specific taxpayer, whereas VAT is charged on a transaction. Generally, the end-user of a prod-
uct pays the VAT. VAT is collected at each stage of a process during which raw materials are
changed into an end product and eventually sold to a consumer. The essential characteristics of a
VAT-type tax are as follows:
• the tax applies generally to transactions related to goods and services;
• it is proportional to the price charged for the goods and services;
• it is charged at each stage of the production and distribution process; and
• the taxable person (vendor) may deduct the tax paid during the preceding stages, i.e. the burden
of the tax is on the final consumer.
Vendors collect VAT from customers or clients on behalf of SARS. VAT is a tax that SARS levies on
the consumption of goods and services. Sales of goods and services are subject to output tax, and
goods and services purchased are subject to input tax. SARS currently charges VAT at a rate of
14%. In order to be part of the VAT system, the VAT vendor needs to fulfil certain requirements. The
following example explains how VAT vendors should treat VAT at each stage of a transaction:
EXAMPLE 9.1
Required:
Illustrate the effect of VAT on the transaction below by means of a diagram and calculations.
Information:
A VAT-registered farmer sells 10 pineapples for R1 each to a VAT-registered canning factory. The farmer
does not charge the factory any VAT, as the supply of fresh fruit is zero-rated.
The canning factory also buys canning metal from another vendor for R22,80 (including 14% VAT). It manu-
factures 20 cans of pineapple pieces and sells them to a supermarket for R2,28 each (including 14% VAT).
The selling price of each can of pineapple pieces includes 28c VAT. The factory must therefore pay output
tax of 28c on each can sold, which in turn will be claimed as input tax by the supermarket.
The supermarket sells 15 of the 20 cans to its customers for R3,42 each (inclusive of 42c VAT).
The supermarket must declare output tax of 42c on each can of pineapple pieces sold. Since the super-
market’s customers are the final consumers and not registered for VAT, they will not claim any input tax on the
42c VAT charged.
Note: for the sake of simplicity, it is assumed that the farmer has no other input tax to claim.
(continued)
Solution
Farmer Canning Factory Supermarket Customers

Selling price = R10 Selling price = R4,60 Selling price = R51,30
(10 units @ R1) (20 units @ R2,28) (15 units @ R3,42)
Supply Supply Supply
Output tax = nil Output tax = R5,60c Output tax = R6,30c

Input tax = nil Input tax = R2,80c Input tax = R5,60c Final consumers
No input tax or
Net VAT = nil Net VAT = R2,80c Net VAT = R0,70c output tax
SARS
Farmer nil
Canning Factory R2,80c
Each vendor submits a return for each Supermarket R0,70c
tax period to SARS, together with any Total Received R3,50c
payment which may be due.
• Output tax: the VAT charged to customers by the VAT vendor.

• Input tax: the VAT that the customers pay to registered VAT vendors.
• The difference between output tax and input tax = VAT payable/refundable to/by
SARS.
9.2.1 Registration
A person can only register for VAT if he or she is carrying on an enterprise. An enterprise is any activ-
ity (other than the activities of a local authority) which is carried on continuously or regularly by any
person in the Republic or partly in the Republic, in the course of which goods or services are sup-
plied for consideration, whether for profit or not. This thus includes activities of any commercial, finan-
cial, industrial, mining, fishing or professional concern, as well as any association or club.
Once-off or occasional activities would not be regarded as carrying on an enterprise.
Certain activities are, however, specifically excluded from the definition of enterprise. A few examples
of these are:
• the rendering of services by any person for which he or she receives ‘remuneration’ unless the
person is carrying on an enterprise independently from his or her employer;
• a hobby or recreational pursuit of a natural person;
• rendering exempt activities (refer below for more details in this regard);
• supplying commercial accommodation where the taxable supplies have not, or cannot reason-
ably be expected (in the next 12 months) to exceed R120 000.
A person who carries on an enterprise can thus register for VAT and will be known as a VAT vendor.
A VAT vendor is any person who is already registered under the VAT Act, or any person whom the
VAT Act requires to be registered. A partnership is a separate person for VAT purposes. The partner-
ship, and not the individual partners, should register as a VAT vendor. This differs from income tax,
where each partner is a registered taxpayer for income tax purposes in his or her own name, and not
the name of the partnership.
There are two types of VAT registration, namely compulsory registration and voluntary registration.
Under compulsory registration, the vendor is required under law to register for VAT. Voluntary regis-
tration, as the name implies, affords the taxpayer the choice of whether to register for VAT or not.
Both of these types of registrations have certain limits and requirements that will be discussed next.
Compulsory registration
In terms of the VAT Act, from 1 April 2014, a legal person (and not the business) has to register:
• at the end of the month during which the total value of taxable supplies for the preceding
12 months exceeded R1 000 000; or
• when the person has a written contractual commitment to make taxable supplies exceeding
R1 000 000 within the next period of 12 months; or
• when the joint turnover of more than one business carried on by the person exceeds R1 000 000.
Examples of a written contractual commitment includes things like:
• a commercial lease agreement; or
• a commitment by Government in a contractual tender to provide goods and services.
All foreign suppliers of electronic services as defined in section 1 of the VAT Act (e.g. electronic
books, music, movies and programs) to South African customers will, from 1 April 2014, also be re-
quired to register for VAT – however, the monetary threshold for compulsory registration applicable to
these foreign suppliers is R50 000. However, from 1 April 2015 non-resident suppliers of electronic
services whose total value of taxable supplies have exceeded R50 000 will only be liable to register
in respect of these services if at least any two of the following circumstances are applicable:
(1) e-services are supplied to South African residents; or
(2) payment for such e-services originates from a South African bank; or
(3) the recipient has an address in South Africa.
The reason for the lower threshold for these foreign suppliers is to ensure that every effort is made to
level the playing field between local and foreign suppliers of electronically-supplied services.
The above two types of registration are referred to as a compulsory registration. If liable to register
for VAT (due to compulsory registration), the person must complete a VAT101 form and submit it to
the local SARS office not later than 21 business days from the date of liability.
(continued)
(continued)
(continued)
(continued)
(continued)
(continued)
Figure 9.1: A VAT101 form
To complete this form, refer to the SARS Guide for the completion of VAT registration application
forms.
The amount of R1 000 000 refers to the value of the taxable supplies, excluding VAT, and
certain other items that are not supplied in the ordinary course of business.
Voluntary registration
In certain instances, the VAT Act allows a person to register voluntarily as a vendor, even if the
R1 000 000 requirement is not met.
Persons allowed to voluntarily register for VAT

To use the VAT system, the taxpayer must be one of the following:
• a municipality; or
• a designated enterprise (for example, a welfare organisation); or
• a business with a total value of taxable supplies that has exceeded R50 000 (but did not exceed
R1 000 000) in the preceding 12-months; or.
• a business with a total value of taxable supplies that has not exceeded R50 000 but could
reasonably be expected to exceed R50 000 within 12 months from the date of registration.
In respect of the last point above, the Minister of Finance, on 29 May 2015, issued regulations (Regu-
lation No. 446) prescribing the requirements that must be met by a person applying for voluntary
registration in these circumstances. In terms of the regulations, the Commissioner will be satisfied
that a person can reasonably be expected to make taxable supplies in excess of R50 000 in the
12 months following the date of registration where:
• in the case of a person who has made taxable supplies for more than 2 months, such person has
proof that the average value of taxable supplies in the preceding 2 months prior to the date of
application for registration exceeded R4 200 per month; or
• in the case of a person who has made taxable supplies for only one month preceding the date of
application for registration, such person has proof that the value of the taxable supplies made for
that month exceeded R4 200; or
• the person is, in terms of a contractual obligation in writing, required to make taxable supplies in
excess of R50 000 in the 12 months following the date of registration; or
• the person has acquired finance from certain specified credit providers, wherein credit has been
provided to fund the expenditure incurred or to be incurred in furtherance of the enterprise, and
the total repayments in the 12 months following the date of registration will exceed R50 000; or
• the person has proof of expenditure incurred or to be incurred in connection with the furtherance
of the enterprise as set out in a written agreement, and proof of payment or a payment agreement
evidencing payment in the furtherance of the enterprise which has either exceeded R50 000 at
the date of application for registration; that will in any consecutive period of 12 months begin be-
fore the date of application and ending after the date of application, exceed R50 000, or will in
the 12 months following the date of application for registration exceed R50 000.
A further category of persons that are entitled (with effect from 1 April 2014) to register for VAT on the
voluntary basis are persons that carry on an enterprise of a nature as set out by the Minister in any
regulation. The nature of the enterprise conducted by these persons must be such that it is con-
ducted continuously and regularly by the person and it must be likely to make taxable supplies only
after a period of time. Such a business will generally incur substantial costs which are only likely to
result in the making of taxable supplies after a period of time. The regulation specifying these types
of businesses that will qualify for voluntary registration was published on 29 May 2015 (Regulation
No. 447). These enterprise activities broadly include the following types of activities: agriculture,
farming, forestry and fisheries; mining; ship and aircraft building; manufacture or assembly; property
development, infrastructure development and beneficiation.
There are various reasons why a person would want to voluntarily register for VAT. Many small busi-
nesses sought voluntary VAT registration to prove their legitimacy to their clients and also to obtain
government tenders, which gave rise to the need for these persons to register voluntarily. Taxpayers
that carry on zero-rated enterprises (such as exporters, see paragraph 9.2.5 for more details) would
also choose voluntary VAT registration, as they would be able to make zero-rated supplies (this
implies that no VAT needs to be paid to SARS as the goods/services are zero-rated) but they would
be able to claim input tax back from SARS on expenses that were incurred.
EXAMPLE 9.2
Required:
Determine whether the following taxpayers (all sole proprietors where applicable) must register for VAT or
whether the taxpayer can voluntarily register for VAT:
Type of business Turnover of taxpayer
1. Hairdresser R150 000 per annum

2. Lecturer and part-time independ- R300 000 per annum salary as lecturer and R150 000 consulting
ent tax consultant income
3. Leasing agent (of commercial R35 000 per annum, but will be signing a leasing contract next
property) month that will result in additional taxable supplies of R70 000 per
annum
Solution
1. As the hairdresser is producing taxable supplies valued at more than R50 000, he or she may voluntarily
register for VAT.
2. The lecturer will not be allowed to register for VAT based purely on the lecturing salary that he or she re-
ceives, as earning a salary (remuneration) is specifically excluded from the definition of enterprise. The
lecturer will not be producing any taxable supplies from earning his or her salary. However, the additional
consulting income that the lecturer earns is not a salary, but other income that could be regarded as be-
ing earned from carrying on an enterprise; therefore it would be seen as taxable supplies. As the consult-
ing income (taxable supplies) is valued at more than R50 000, the lecturer could register as a VAT vendor
in respect of the consulting business carried on by him or her.
3. Although the leasing agent has not yet produced taxable supplies of more than R50 000, but will do so in
the future (next month), the leasing agent may register for VAT in the month that the leasing contract is
signed – even before the taxable supplies exceed the amount of R50 000 as there is a reasonable expec-
tation that the taxable supplies will exceed R50 000 in the future and the person is, in terms of a contrac-
tual obligation in writing, required to make taxable supplies in excess of R50 000 in the 12 months follow-
ing the date of registration.
Implications of voluntary registration

The above qualifying persons are fully entitled to refunds from the day that they register for VAT.
However, SARS has the power to de-register these persons if SARS determines that the business
enterprise has ceased activities.
A person must examine the customers of the business before deciding to register voluntarily. If the
person’s customers are mainly vendors, the person may wish to register voluntarily for VAT, as he or
she will be entitled to claim input tax in respect of all purchases (taking the above limitations into
account). The person’s customers will also be able to claim the VAT that the person levied on sales.
Another instance where a person may wish to register, is if his or her input tax is likely to exceed the
output tax after registration (e.g. if the person is an exporter), but again the limitations mentioned
above would have to be taken into account.
After registering for VAT, this taxpayer will have to add VAT to all prices. The other administrative
requirements in terms of handing in returns, keeping records for at least 5 years, issuing invoices,
and so forth, also have to be met as soon as the person is registered for VAT. The onus rests on the
person to register when it becomes necessary, and he or she must do this within 21 days after meet-
ing the requirements for registration.
Registration of non-executive directors

As explained above, a person carrying on an enterprise is required to register for VAT – either volun-
tarily or it will be compulsory. Non-executive directors (NEDs), however, always caused uncertainty
as it was not clear whether they were regarded as employees receiving ‘remuneration’ (as mentioned
in the second paragraph of 9.2.1 above and thus not required to register for VAT) or whether they
were independent contractors (and therefore liable to register for VAT if their fees for services ren-
dered exceeded the VAT registration threshold of R1 million). This uncertainty was clarified by SARS
in their Binding General Rulings 40 and 41 (‘the BGRs’) issued on 10 February 2017 and effective
from 1 June 2017.
Before SARS’ position on the matter is explained, it is important to understand who a NED is. For the
purposes of the BGRs, a NED is a director who is not involved in the daily management and opera-
tions of a company, but simply attends, provides objective judgment, and votes at board meetings.
Furthermore, in terms of BGR40, it is evident that SARS has accepted that a NED is not a ‘common
law’ employee and carries on a trade independently of the company. Director’s fees paid to such a
director cannot be regarded as ‘remuneration’ and will not be subject to employees’ tax.
BGR40 does not apply in respect of non-resident NEDs; only to resident NEDs.
Taking into account the above, it is clear that it is SARS’ opinion that a NED is regarded as carrying
on an ‘enterprise’ and is required to register and levy VAT in respect of any director’s fees if the activ-
ities are carried on in the Republic and if the value of such fees exceed R1 million. With regard to
voluntary registration, a NED may choose to voluntarily register for VAT where the value of the fees
exceeds the R50 000 as explained above.
The BGRs are not clear on what the treatment of NEDs is for tax periods prior to 1 June 2017 nor on
any past registration liability for NEDs who have already exceeded the VAT registration threshold. It
appears that NEDs will not be required to account for VAT in respect of directors’ fees received prior
to this date, provided that the NED was subject to employees’ tax.
EXAMPLE 9.3
Required:
Determine whether the following taxpayers (all non-executive directors) must register for VAT or whether the
taxpayer can voluntarily register for VAT:
Name of NED Income of NED
1. Mr Windson R650 000 per annum NED fees and R500 000 per annum in other consulting
fees
2. Ms Vitole R800 000 per annum NED fees and R1 900 000 per annum salary as a CFO
of a listed entity
3. Mr Samanga R350 000 per annum as NED fees and R400 000 per annum in other consult-
ing fees
Solution
1. As Mr Windson earns taxable supplies of R1 150 000 (R650 000 + R500 000) for all enterprises carried
on by him, he will be required to register as a VAT vendor as his taxable supplies exceed R1 million per
annum.
2. Ms Vitole earns taxable supplies of only R800 000 because the salary she earns as a CFO is not earned
from an ‘enterprise’ seeing that it is regarded as ‘remuneration’. She will therefore not be required to reg-
ister for VAT as her taxable supplies of R800 000 do not exceed R1 million per annum.
3. Mr Samanga receives taxable supplies to the value of R750 000 per annum (R350 000 + R400 000). He
is thus not forced to register for VAT as his taxable supplies are less than R1 million. He may, however,
voluntarily register for VAT as his taxable supplies exceed R50 000 per annum.
For further detailed explanations regarding the above and the timing of registration as a NED for VAT,
please refer to the SAICA VAT Guide for NED services:
(https://www.saica.co.za/portals/0/documents/SAICA_VAT_Guide_NED_2017.pdf).
Tax periods
On acceptance of a vendor’s registration, SARS will allocate a tax period to the vendor. SARS regis-
ters every VAT vendor for a specific tax period, which means that SARS requires a vendor to submit
returns and account for VAT according to the tax period it allocated to the vendor. Depending on the
size of the business, the tax period may vary from one month to a year. SARS will register a vendor
for one of the following five categories (there used to be, before 1 July 2015, a sixth category that
catered for small businesses but due to the small uptake it was decided that this category would be
absorbed into either Category A and B):
Table 9.1: Categories of VAT vendors
Category A Two-month periods ending on the last day of

• January
• March
• May, etc. (odd-numbered months)
Applicable to vendors with taxable supplies that do not exceed R30 million for 12 months.
Category B Two-month periods ending on the last day of

• February
• April
• June, etc. (even-numbered months)
Applicable to vendors with taxable supplies that do not exceed R30 million for 12 months.
Category C One-month periods ending on the last day of each month

Applicable to vendors whose taxable supplies during a 12-month period exceed, or are likely
to exceed, the value of R30 million (including taxable supplies of any branches, divisions or
separate enterprises of the vendor, if registered as separate vendors).
Category D Six-monthly periods, ending on the last day of February and August each year
Applicable to a vendor who is a farming enterprise with a turnover of less than R1,5 million per
year. Micro businesses that are registered for the turnover tax may also account for VAT under
this category if registered for VAT.
Category E Twelve-month periods ending on the last day of the enterprise’s financial year
Applicable to companies or trusts that receive only rental income or administration or manage-
ment fees from a connected person, and where all parties are registered vendors for VAT.
Tax periods end on the last day of a calendar month. However, a vendor may apply to SARS in
writing for their tax period to end on another fixed day or date, which is limited to 10 days before or
after the end of the month (the 10-day rule). This must be approved in writing and can only be
changed with the written approval of SARS. A vendor who wishes to apply this option must select a
fixed day or date approved by the Commissioner before or after the end of the tax period and must
use it consistently for a minimum period of 12 months.
Vendors’ returns must be submitted on/before the 25th day of the following month after the end of
their tax periods. For example, if a vendor’s tax period ends on 31 March, this vendor will have until
25 April to submit the return and payment. However, a vendor that has an accounting date within 10
days before or after the end of the month in which the tax period ends, may use that date as the last
day for the tax period.
The vendor must submit the VAT return before close of business on the preceding Friday
if the 25th falls on a Saturday or Sunday. SARS must receive any payment made and
placed in a SARS drop-box on a business day by no later than 15h00. Where SARS
receives payments after 15h00, it will deem payment as received on the first following
business day.
There are several ways to make a VAT payment. The vendor may pay:
• by post;
• at a SARS cash office;
• via electronic funds transfer (EFT; i.e. debit order, eFiling and internet banking); or
• at various banks.
The vendor must pay the VAT due to SARS on/before the 25th or the last preceding business day of
the month following the end of the tax period. A summary of the dates on which VAT vendors need to
submit the returns and make payment to avoid penalties and interest being levied by SARS appears
in Table 9.2:
Table 9.2: Dates for submission of VAT returns and associated payments
Payment method Return Payment
Cash 25th 25th
Cheque 25th 25th
Postal order 25th 25th
Payment at any of the four major banks 25th 25th
VAT201(a) debit order 25th Last business day
eFiling of return and payment via SARS eFiling Last business day Last business day
Electronic funds transfer (including internet banking) 25th 25th
EXAMPLE 9.4
Required:
For each of the following cases, state when the VAT vendor will have to pay the VAT (indicate when the tax
period ends and also the date on which the VAT vendor will have to pay the VAT to SARS):
Date of sale Turnover of taxpayer
1. 8 April 2018 R5 million – Category A
2. 15 March 2018 R3 million – Category B
3. 16 June 2018 R1 million – farmer
4. 13 July 2018 R33 million
5. 25 July 2018 R900 000 – Category B
6. 6 November 2017 R400 000 – receives only rental income from connected persons (who are all
registered VAT vendors); financial year-end is 30 September
Solution
1. This sale will fall into the tax period that ends on 31 May 2018. The VAT vendor will have to submit the
return and any VAT payable before the 25th day of the following month, or the last business day before
the 25th. As 25 June 2018 is a Monday, the VAT vendor will have to submit the VAT return on Monday,
25 June 2018 (before 15h00 if submitted in a SARS drop box).
2. This sale will fall into the tax period that ends on 30 April 2018. The VAT vendor will have to submit the
return and any VAT payable before the 25th day of the following month, or the last business day before
the 25th. As 25 May 2018 is a Friday, the VAT vendor will have to submit the VAT return on Friday,
25 May 2018 (before 15h00 if submitted in a SARS drop box).
3. As this taxpayer is a farmer, he or she will fall into Category D. This sale will fall into the tax period that
ends on 31 August 2017. The VAT vendor will have to submit the return and any VAT payable before the
25th day of the following month, or the last business day before the 25th. Although 25 September 2017 is
a Monday, it is also a public holiday; therefore the VAT vendor will have to submit the VAT return before
15h00 on Friday, 22 September 2017.
(continued)
4. This taxpayer will fall into Category C; therefore the sale will fall into the tax period that ends on
31 July 2017. The VAT vendor will have to submit the return and any VAT payable before the 25th day of
the following month, or the last business day before the 25th. As 25 August 2017 is a Friday, the VAT
vendor will have to submit the VAT return before 15h00 on Friday, 25 August 2017.
5. As this sale will fall into the tax period that ends on 31 August 2018, the VAT vendor will have to submit
the return and any VAT payable before the 25th day of the following month, or the last business day be-
fore the 25th. As 25 September 2018 is a Tuesday, the VAT vendor will have to submit the VAT return on
Tuesday, 25 September 2018 (before 15h00 if submitted in a SARS drop box).
6. As this is a Category E taxpayer, this sale will fall into the tax period that ends on 30 September 2018.
The VAT vendor will have to submit the return and any VAT payable before the 25th day of the following
month, or the last business day before the 25th. As 25 October 2018 is a Thursday, the VAT vendor will
have to submit the VAT return on 25 October 2018 (before 15h00 if submitted in a SARS drop box).
9.2.2 The accounting basis

The VAT Act provides for two accounting bases. The accounting basis determines the time of supply
for VAT purposes, which indicates when the VAT vendor must pay the output VAT to SARS. The two
accounting bases, which a vendor may apply to account for VAT, are by invoice or by payment.
Invoice basis
In terms of the invoice basis, the vendor accounts for VAT when issuing an invoice or receiving any
payment, whichever occurs first. SARS registers all vendors, other than the exceptions discussed
below, on this basis. All vendors must account for VAT on the invoice (accrual) basis, unless applica-
tion has been made and permission has been received from the Commissioner to use the payments
basis of accounting.
Payments basis
In terms of the payments basis, the vendor accounts for VAT when making or receiving a payment or
part of a payment.
The payments basis is only available to:
• a public authority, public water board, regional electricity distributor, municipality or association
not for gain; or
• the South African Broadcasting Corporation Limited; or
• a natural person or a partnership (of natural persons), where the value of taxable supplies
(excluding VAT) will not or is not likely to exceed R2,5 million per annum; or
• a person carrying on a business where the value of taxable supplies made or to be made has not
exceeded R50 000 but can be reasonably be expected to exceed that amount within 12 months
from the date of registration (however, this person must use the invoice basis from the tax period
where the taxable supplies exceed R50 000); or
• foreign suppliers of electronic services.
Thus vendors that have been allowed to voluntarily register in terms of the Regulation (see the dis-
cussion of voluntary registration above) must account for VAT on the payment basis until the R50 000
threshold is met. Thereafter they are required to use the invoice basis.
All the vendors mentioned above qualifying for the payment basis must apply in writing to SARS for
registration on the payments basis. The payments basis means that the vendor accounts for VAT
when making payments (purchases) and receiving payments (sales), that is, when cash changes
hands. Vendors who account for tax on the payments basis (other than a public authority, municipal
entity or municipality) are nevertheless required to account for VAT on the invoice basis on supplies
of R100 000 (including VAT) or more. The advantages of the payments basis are that it suits small
businesses, facilitates cash flow and is advantageous when the vendor allows lengthy periods of
credit. However, the disadvantages of the payment basis are that it is not available to everyone, VAT
is deducted only after payments have been made to suppliers and it is potentially more difficult to
implement accounting systems to manage, administer and calculate accurately.
The vendor must inform SARS if his or her status changes from one basis to the other. Where a ven-
dor’s tax basis changes, he or she will have to provide details to the Commissioner on the prescribed
form so that SARS can calculate the tax payable or refundable because of the change to the tax
basis.
EXAMPLE 9.5
Required:
When will Joe Bloggs have to account for the VAT on this transaction in the following situations?
(a) Joe is accounting for VAT on the payments basis.
(b) Joe is accounting for VAT on the invoice basis.
Information:
Joe Bloggs, trading as Strictly Stationery, registered for VAT as a Category A taxpayer. He enters into a trans-
action to supply SJ Office Furniture with 20 boxes of paper. The invoice date is 25 March, the day on which
Strictly Stationery delivered the paper. SJ Office Furniture has an account with Strictly Stationery, and settles
the amount on 30 April.
Solution
Part A
Payments basis
On the payments basis, the vendor only accounts for VAT on receipt of payment, i.e. 30 April. Therefore, the
VAT on this transaction will fall into the tax period ending 31 May.
Part B
Invoice basis
On the invoice basis, the vendor accounts for VAT at the earlier of payment or invoice date, i.e. 25 March.
Therefore, the VAT on this transaction will fall into the tax period ending 31 March.
In most cases, the accounting basis will determine when the vendor will account for output or input
tax. However, there are three exceptions to the general rules. These exceptions, which are subject to
special rules that ignore the accounting basis, are as follows:
J Instalment credit agreement
Vendors who supply goods under an instalment credit agreement must account for the full
amount of output tax at the start of the agreement. Similarly, the purchaser must claim the full in-
put tax at the start of the agreement.
J Fixed property
Vendors who make supplies of fixed property must only account for output tax on the actual
amounts paid. Similarly, the purchaser can only claim input tax to the extent that he or she has
paid for the fixed property.
J Where the consideration is more than R100 000
Where vendors who are registered on the payments basis produce supplies for a consideration
of R100 000 or more, they must account for the full output VAT in the period in which the supply
occurs, and not when they receive payment. This rule does not apply to fixed property, which has
its own special rule (refer to the special rule above).
9.2.3 Administration
A registered VAT vendor has to adhere to a number of rules and regulations. This paragraph high-
lights some of these rules and regulations.
Tax invoices
The vendor can only claim input tax if in possession of a valid tax invoice. Relief is provided if the
vendor does not receive a valid tax invoice from a supplier or if the invoice received does not meet all
the requirements of a valid tax invoice. In these instances, a vendor is entitled to use alternative docu-
mentation containing such information as the Commissioner may specify to substantiate the vendor’s
entitlement to an input tax deduction. However, the vendor must be able to demonstrate that a sin-
cere effort has been made to obtain the proper documents and must maintain proof of these efforts.
Furthermore, the vendor will have to make an application for a ruling no later than two months prior to
the expiry of the five-year prescription period and only if and when the ruling is issued, may the
amount be deducted as an input tax deduction at that later stage. Backdating the claim to a past tax
period that has already been closed will not be permitted in these instances.
If the vendor purchased goods or services from a non-registered vendor, the registered vendor can-
not claim input tax, as he or she has not paid any VAT on the goods or services. The only exception
to this rule is when purchasing second-hand goods from non-vendors (refer to the discussion after
this section).
A registered vendor is only obliged to issue a tax invoice if the total consideration for the supply
exceeds R50. A supplier must give the purchaser a tax invoice within 21 days of a request to do so.
Sometimes a supplier (a VAT vendor) makes use of an agent to act on the supplier’s behalf. In this
case, the supplier is known as the principal. Where any supply is made by an agent on behalf of a
principal, the supply is deemed to be made by the principal for VAT purposes. The agent is, how-
ever, permitted to issue a tax invoice in relation to a supply made on behalf of the principal as if the
agent had made that taxable supply. The time limit for the agent to issue a tax invoice for the supply
made on behalf of the principal is also within 21 days from the date of supply (this time limit became
effective from 1 April 2015).
Copies of tax invoices must clearly indicate that they are only copies, since a vendor may only issue
one original tax invoice per transaction. If there is a change in the conditions of a sale, the vendor
should issue a debit or credit note.
A vendor must issue a full tax invoice where the consideration for a supply exceeds R5 000. The fol-
lowing information, stated in South African currency, must appear on a tax invoice (unless it is a zero-
rated supply):
• the words ‘tax invoice’ or ‘VAT invoice’ or ‘invoice’;
• the name, address and VAT registration number of the supplier;
• the name, address and VAT registration number (if the recipient is a vendor) of the recipient;
• an individual serial number and the date on which the vendor issued the tax invoice;
• a full and proper description of the goods (indicating, where applicable, that the goods are sec-
ond-hand goods) or services supplied;
• the quantity or volume of the goods or services supplied; and either
• the value of the supply, the amount of tax charged and the consideration for the supply; or
• the consideration for the supply (where the amount of tax charged is calculated by applying the
tax fraction to the consideration); and either the tax charged, or a statement that it includes a
charge for tax and the rate at which the tax was charged.
Where the consideration for the supply does not exceed R5 000, the vendor may issue a shortened
tax invoice containing only the following particulars:
• the name and VAT registration number of the supplier;
• an individual serial number and the date on which the vendor issued the tax invoice;
• a description of the goods (indicating, where applicable, that the goods are second-hand goods)
or services supplied; and either
• the value of the supply, the amount of tax charged and the consideration for the supply; or
• the consideration for the supply (where the amount of tax charged is calculated by applying the
tax fraction to the consideration); and either the tax charged, or a statement that it includes a
charge for tax and the rate at which the tax was charged.
Table 9.3 provides a summary of the above, comparing the information that must be reflected on a
tax invoice for it to be considered valid.
Table 9.3: Information that must appear on a valid tax invoice
Full tax invoice Abridged tax invoice

(Consideration of R5 000 or more) (Consideration less than R5 000)
• The words ‘TAX INVOICE’, ‘'VAT INVOICE’ or • The words ‘TAX INVOICE’, ‘VAT INVOICE’ or
‘INVOICE’ ‘INVOICE’
• Name, address and VAT registration number of • Name, address and VAT registration number of
the supplier the supplier
• Name, address and VAT registration number of
recipient
• Serial number and date of issue • Serial number and date of issue
• Full and proper description of the goods (specify- • A description of the goods the goods (specify-
ing that they are second-hand, if applicable) and/ ing that they are second-hand, if applicable)
or services and/or services
• Quantity or volume of goods or services supplied • Price & VAT (according to any of the three ap-
• Price & VAT (according to any of the 3 approved proved methods discussed below)
methods discussed below)
Table 9.4 explains the different approved ways in which the vendor may indicate the price and VAT
for taxable supplies on a tax invoice.
Table 9.4: Approved methods for indicating price and VAT on invoices for taxable supplies
Method 1 Method 2 Method 3

All individual amounts reflected Total consideration only and Total consideration and
VAT rate charged VAT charged
Price (excl. VAT) R500 The total consideration R570 The total consideration R570
VAT charged R 70 VAT included @14% VAT included R 70
Total including VAT R570
Figure 9.2 provides an example of a full tax invoice, as contained in the SARS VAT 404 Guide for
Vendors:
Figure 9.2: A full tax invoice
The information that must be contained in a tax invoice, credit or debit note for the supply of elec-
tronic services by an electronic services supplier is set out in Binding General Ruling 28 on the SARS
website.
Vendors who want to issue electronic tax invoices to their customers, instead of paper format tax
invoices, should indicate the following details, as contained in VAT NEWS 20, on these electronic tax
invoices:
• the name, address and VAT registration number of the seller;
• the name and address of the purchaser;
• a serialised invoice number;

• the date;
• a proper description of the goods (specifying that they are second-hand, if applicable) or ser-
vices supplied;
• the date of issue;
• the volume or mass of the goods; and either
• the consideration for the supply and the VAT charged; or
• a statement that VAT is included in the price charged, and the rate of VAT charged.
The vendor must send these electronic tax invoices in encrypted format (at least 128 bytes) over a
secure line, or they must contain an electronic signature. The recipient of the supply must provide
confirmation, in writing, that he or she agrees to accept electronic invoices for the purpose of claim-
ing input tax. The vendor may not issue any other tax invoice, and all copies extracted by the recipi-
ent must bear the words ‘copy tax invoice’.
Second-hand goods
A vendor may claim an input tax deduction for the purchase of second-hand goods from a non-
vendor, despite the fact that the non-vendor raised no VAT on the invoice provided. SARS only allows
this claim if the purchaser/vendor has obtained the following details where the value of the supply is
R50 or more:
• a declaration by the supplier stating that the supply is not a taxable supply;
• the name, address and ID number of the supplier (ID number of the representative person if the
supplier is a company or close corporation). The purchaser (vendor) must verify the supplier’s
name and ID number against his or her ID book or passport, and the name and registration num-
ber of the company or CC against the business letterhead;
• a copy of the supplier’s ID, and in the case of a company or CC also a business letterhead or
similar document that shows the name and registration number allocated by the Registrar of
Companies (the vendor must retain these documents where the value of the supply is R1 000 or
more);
• the date of acquisition;
• the quantity or volume of goods;
• a description of the goods;
• the consideration for the supply; and
• proof of payment.
SARS designed the VAT 264 form, containing all the above details, to assist vendors in
complying with these requirements. Vendors must complete and maintain this form for the
prescribed recordkeeping period as part of their records for VAT purposes.
From 1 April 2015, second-hand goods made from precious metals (such as gold) were
excluded from obtaining the notional input tax deduction. That is vendors were not en-
titled to deduct a notional input tax deduction of the acquisition of gold and goods
containing gold which were previously owned and used. This amendment was meant to
address fraud relating to illegally mined gold being misrepresented as purchased
second-hand jewellery. However, this amendment raised some concerns and was re-
garded as too restrictive, especially for second-hand dealers. Therefore, from 1 April
2017 a notional input tax deduction on goods containing gold is allowed, provided the
goods are sold in the same or substantially the same state as when those goods were
acquired.
Figure 9.3: A VAT264 form
Debit and credit notes

The VAT Act also provides for the issue of debit notes and credit notes where a vendor issued a tax
invoice in relation to an original supply, and where the vendor cancelled that supply, or the nature of
that supply has changed fundamentally, or the vendor altered the consideration, or the buyer
returned the goods or services.
Debit and credit notes

The following information must appear on a debit and credit note:
• the words ‘Debit Note’ or ‘Credit Note’ (as the case may be);
• the name, address and VAT registration number of the supplier;
• the name, address and VAT registration number of the recipient (if the recipient is a vendor)
(unless an abridged tax invoice was issued);
• the date on which the vendor issued the debit or credit note;
• a brief explanation of the circumstances giving rise to the debit or credit note;
• enough information to be able to identify the transaction to which the debit or credit note refers;
and either
i the value of the supply, the amount of tax charged and the consideration for the supply; or
i the consideration for the supply (where the amount of tax charged is calculated by applying
the tax fraction to the consideration); and either the tax charged, or a statement that it in-
cludes a charge for tax and the rate at which the tax was charged.
The vendor may also issue electronic debit and credit notes according to the above guidelines, sub-
ject to the requirements set out in the VAT Act.
As is evident from the above documentation requirements, both the Vat Act and the Tax Administra-
tion Act 28 of 2011 require vendors to keep very detailed records in order to keep an audit trail of all
the vatable transactions. A vendor must be able to validate all the amounts of input and output tax
calculated. Tax invoices, debit notes and credit notes and other records, must be kept for at least
five years in order for the Commissioner to determine particulars of any transaction.
Returns, payments and refunds

SARS requires that a registered vendor complete a VAT return (VAT201). The vendor can request a
VAT201 return via any of the following channels:
• eFiling;
• phoning the SARS Contact Centre;
• visiting a SARS branch; or
• writing a request and posting it to SARS.
Vendors who submit their VAT201 returns manually will be required to request their VAT201 re-
turns from SARS via a SARS branch or the SARS Contact Centre on 0800 00 7277.
SARS implemented a new Vendor Declaration form (VAT201 Declaration) in April 2011. The form is in
landscape format with the same fields as the previous VAT201 return, but contains the following addi-
tional fields:
• demographic information;
• the declarant’s signature; and
• a Payment Reference Number (PRN), which SARS will pre-populate.
SARS prepared a step-by-step guide for the accurate and honest completion (manually or via eFiling)
of the VAT Vendor Declaration form (VAT201 Declaration). You can find this guide electronically at
http://sars.gov.za. Go to ‘Find a publication and type in– ‘Step-by-step guide for the completion of
VAT201 vendor declaration’.
A vendor must submit the return and payment due (if any) by the 25th day of the month immediately
after the end of the tax period. If the 25th day does not fall on a business day (i.e. if it falls on a Satur-
day, Sunday or public holiday), the vendor must submit the return on the last business day before the
25th day of that month. If the vendor pays via electronic payment, he or she should make the pay-
ment before the end of the month.
Practical example of a VAT201 return:
EXAMPLE 9.6
Required:
Complete the figures in the relevant blocks on the VAT201 return that Mr Joe Soap needs to submit to SARS
on behalf of Mr Nteo on 24 November 2018.
Information:
Mr A. Nteo is a sole proprietor, trading as Nteo's Furnishers. He is a registered VAT vendor under Category B
on the invoice basis.
At the end of October 2018, the sales (for September and October 2018) were summarised as follows and
handed over to his accountant, Mr Joe Soap (figures include VAT, where applicable).
Sales R
Sales invoices (excluding cash sales) nos. 24–87 issued 37 821,00
Cash sales 22 965,00
Redundant computer sold 2 500,00
Insurance paid out on stolen delivery truck 40 000,00
Expenses
New computer purchased 12 000,00
Stock and overheads 20 000,00
Credit notes issued 1 580,00
Solution
Mr Soap does the following calculations for the two-month period ending October 2017 for completion of
Mr Nteo’s VAT201 return:
R
Output tax
Sales (excluding cash sales) 37 821,00
Add: Cash sales 22 965,00
Total sales (block 1) 60 786,00
Output tax (block 4) [block 4 × 14/114] 7 464,95
Computer (block 4A) 2 500,00
Output tax (block 4A) [block 4A × 14/114] 307,02
Insurance (block 12) [R40 000.00 × 14/114] 4 912,28
Total output tax [block 4 + block 4A + block 12] 12 684,32
Input tax
Computer (block 14) [R12 000.00 ×14/114] 1 473,68
Purchases (block 15) [R 20 000.00 × 14/114] 2 456,14
Credit notes (block 18) [R1580.00 × 14/114] 194,04
Total input tax [block 14 + block 15 + block 18] 4 123,86
VAT payable to SARS (R12 684,32 – R4 123,86) 8 560,46

25/11/2018
23/11/2018
10/18
October 2018 10/18 23/11/2018
23Nov 2018
Figure 9.4: A completed VAT 201 form
Penalties and interest

The rules regarding penalties and interest are mainly dealt with in the Tax Administration Act, how-
ever the circumstances that trigger the imposition of the penalty remains in the VAT Act. An example
is for instance when a vendor fails to pay VAT within the period allowed for payment, a 10% penalty is
imposed.
If a vendor defaults in submitting a tax return, or files a return but omits an item from that return, or
filed a return in which an incorrect statement was made and too little was paid to SARS (that is, the
fiscus is prejudiced) then an understatement penalty can be imposed. The Tax Administration Act
provides for different rates of understatement based on the type of behaviour or the degree of culpa-
bility involved.
The various behaviours will indicate the extent of the penalty that might be imposed. Once the behav-
iour has been determined, SARS must determine whether:
• the vendor made a voluntary disclosure before or after being notified of an audit;
• the vendor was obstructive when engaging with SARS officials;
• it is a repeat case; or
• the case is not defined by any of the above and is thus a standard case.
If none of these behaviours can be identified, an understatement penalty could still be imposed if the
prejudice to SARS is the greater of 5% of the tax properly chargeable or R1 million. This is referred to
as a “substantial understatement”. No understatement penalty will be imposed if the vendor can
prove that the understatement was as a result of a bona fide inadvertent error.
Interest at the prescribed rate will also be payable when a person fails to make a payment within the
required period. SARS calculates this interest from the first day of the month following the month in
which the payment was due, and for each month or portion of each month for which it remains un-
paid. With effect from 1 April 2010, the Commissioner will base his or her discretion to remit interest
solely on whether the vendors incurred the interest as a result of circumstances beyond their control.
Examples of what SARS will consider as circumstances beyond the vendor’s control:
• the destruction of the person’s place of business records by fire, flood or other natural or human-
made disaster;
• key personnel of the business being unavailable due to sudden resignation, ill health or death;
• a person initiating a payment via electronic funds transfer (EFT) to ensure timely payment and
such payment not being made due to a banking system failure.
SARS issued Interpretation Note No. 61: Remission of interest in terms of section 39(7)(a) on
29 March 2011 to provide further guidance in this regard. This dispensation applies to any interest
imposed on/after 1 April 2010. Refer to the SARS website for this Interpretation Note.
(http://www.sars.gov.za/AllDocs/LegalDoclib/Notes/LAPD-IntR-IN-2012-61%20%20Remission%20
Interest.pdf)
9.2.4 Calculating VAT

A vendor can claim input VAT from SARS and has to pay output VAT to SARS. It is important to under-
stand the workings of the VAT system, because it has a direct effect on the cash flow of a business.
Each vendor collects VAT; so, in this way, each vendor acts as an agent for SARS throughout the
production and distribution chain. The VAT that the vendor collects does not belong to the vendor; it
belongs to SARS.
An enterprise that is a registered VAT vendor, and that makes taxable supplies of goods and ser-
vices, must charge output tax on these supplies and collect this output tax from the recipients of the
supplies. If vendor A purchases goods and services from vendor B, vendor A may claim the VAT
paid on such expenses as input tax.
Figure 9.5 provides a diagrammatic representation of the basic structure for calculating a vendor’s
VAT liability.
Sale of goods or services OUTPUT VAT
Standard-rated Zero-rated Exempt

supplies supplies supplies
(all supplies except (listed in the VAT Act (listed in the VAT Act
zero-rated and ex- in section 11) in section 12)
empt)
Output VAT @ 14% Output VAT @ 0% NO output VAT
Less: Input VAT No input VAT
Negative Positive
SARS owes the VAT The VAT vendor owes
vendor SARS
Figure 9.5: A diagrammatic representation of the basic structure for calculating a vendor’s VAT
liability
9.2.5 Output tax

As VAT has to be included in the price that the vendor charges for his or her supplies, every price
charged will have a portion that relates directly to the vendor’s sale and a portion that relates to the
compulsory VAT that the vendor must charge.
Selling price (consid-

= Sales + VAT
eration)
Output tax is the VAT portion of all taxable supplies made by a vendor. A vendor who sells trading
stock to customers must pay the VAT that was charged on the transaction over to SARS.
All the vendor’s transactions in respect of taxable supplies must include VAT. These
transactions include the sale of capital assets and the proceeds of an insurance claim
paid by an insurance company.
It would create a serious administrative problem if the vendor had to pay the output tax over to SARS
after every transaction. This is why vendors are registered for certain tax categories, as discussed
earlier (i.e. Category A, B, C, D or E).
When vendors need to hand in their returns in respect of their VAT tax periods, they total up all the
output tax charged and all the input tax paid, and deduct the input tax from the output tax.
It is compulsory in South Africa for vendors to include VAT in the selling price. As vendors include
VAT in the price, the full price must equal 114% of the sales price:
Selling price (considera-

tion) = Sales 100% VAT 14%
+
114%
Remember: the selling price (excluding VAT) is normally equivalent to the cost price plus
the gross profit %.
EXAMPLE 9.7
Required:
Calculate the missing figures in each of the following situations:
Cost Gross profit % Sales VAT Consideration/

price (based on cost) Selling price
(a) 30% R100 (b) (c)
R1 270 (f) R1 560 (d) (e)
– – (g) (h) R5 700
– – (j) R365 (i)
– – (k) (l) R15 689
(continued)
Solution
(a) = cost price (100%) + 30% of cost price = sales (130%)
= sales r 130%
= R100 r 130%
= R77
(b) = sales × 14%
= R100 × 14%
= R14
(c) = 114% of sales or = sales + 14% VAT
= R100 × 114% = R1100 + (R100 × 14%)
= R114 = R114
(d) = sales × 14%
= R1 560 × 14%
= R218
(e) = sales + VAT or = sales × 114%
= R1 560 + R218, or = R1 560 × 114%
= R1 778 or = R1 778
(f) = (sales – cost price)/cost price
= (R1 560 – R1 270)/R1 270
= 22,8%
(g) = selling price r 114% × 100%
= R5 700/114 × 100
= R5 000
(h) = selling price – sales or sales × 14% or = selling price × 14/114
= R5 700 – R5 000 or = R5 000 × 14% or = R5 700 × 14/114
= R700 or = R700 or = R700
(i) = VAT r 14% × 114%
= R365/14 × 114
= R2 972
(j) = VAT r 14% × 100% or selling price – VAT
= R365/14 × 100 or = R2 972 – R365
= R2 607 or = R2 607
(k) = selling price r 114% × 100%
= R15 689/114 × 100
= R13 762
(l) = selling price – sales or = selling price r114% × 14% or = sales × 14%
= R15 689 – R13 762 or = R15 689/114 × 14 or = R13 762 × 14%
= R1 927 or = R1 927 or = R1 927
The VAT Act provides for two types of supplies:

• taxable supplies, consisting of
i supplies at the standard rate (14%); and/or
i supplies at a zero rate (0%); and
• exempt supplies.
Standard-rate supplies
The Act does not specify supplies that take place at the standard rate, but includes all the supplies
that are not exempt or zero-rated, for example:
• books and newspapers; • business assets sold;
• building materials; • white bread;
• cigarettes; • cool drinks;
• hotel accommodation; • clothing;
• meat and fish; • electricity, water and refuse removal;
• telephone expenses; • medicine;
• furniture; • transport of goods;
• lawyers’ services; • motor vehicles and spares;
• motor repairs; • postage stamps;
• entrance to sporting events; • restaurant services.
• certain fringe benefits;
If a vendor does not specifically zero-rate or exempt a supply, the VAT Act considers the supply as
standard-rated. So, what are zero-rated and exempt supplies?
Zero-rated supplies
Zero-rated supplies occur when vendors make supplies and charge VAT at a rate of 0%, and not
14%, on these supplies. Thus, the vendors charge Rnil output VAT, but SARS allows the vendors a
deduction for the VAT that they have paid (input) on all the goods and services they acquired and
used in making the supplies. Zero-rated supplies are the most favourable supplies, as the vendors
generally find themselves receiving refunds from SARS for the input VAT that they have paid in re-
spect of all the expenses that they have incurred to make the zero-rated supplies.
SARS classified the following supplies as zero-rated in terms of section 11 of the VAT Act:
• exported goods and services;
• the sale of a business as a going concern;
• goods and services used for agricultural or other farming purposes (it was, however, proposed
that these supplies be removed from the list of zero-rated supplies sometime in 2016, but the Na-
tional Treasury stated that it would be doing further analysis on the impact of this removal and
undertaking additional consultations on this matter before its removal);
• certain basic foodstuffs, such as brown bread, maize meal, samp, mealie rice, rice, pilchards,
milk and milk powder, fresh fruit and vegetables (includes mealies, but excludes popcorn), vege-
table oil (excluding olive oil), eggs and lentils;
• services supplied directly in connection with land or any improvements to land or movable
goods, where the land or movable goods are situated in an export country;
• the supply of goods and services under particular circumstances by a vendor to a branch or
main business situated abroad;
• the supply of fuel-levy goods (petrol and diesel, excluding aeroplane fuel);
• illuminating kerosene (not mixed or blended);
• certain goods supplied to a customs-controlled area or an Industrial Development Zone;
• the supply of animals or things by a vendor to a public authority, whereby the vendor receives
compensation in terms of the Animal Diseases Act 35 of 1984;
• municipal rates charged by a municipality (this, however, excludes rates that are charged at a flat
rate to the owner of the rateable property for rates and other goods and services (e.g. refuse
removal and sewage), or where the rates are charged at a flat rate to any person for the supply of
other goods and services only); and
• goods supplied by a vendor to a foreign company, delivered to a registered vendor in South Afri-
ca and used wholly for the purposes of making taxable supplies.
Exported goods
In certain circumstances, a vendor may zero-rate the export of goods from the Republic to ‘export
countries’. If the responsible parties consign and deliver the goods at an address in an export coun-
try, and keep evidentiary documentary proof as set out in Interpretation Note No. 30 (issue 3) (con-
signment and delivery of moveable goods) and Interpretation Note No. 31 (issue 3) (zero-rating of
goods and services), the goods may be zero-rated (direct exports). The zero-rating applies even if
the customer is a South African resident who requests delivery to him or her at another address in an
export country. In some cases, the vendor cannot treat the supply of second-hand goods (goods
previously owned and used) as zero-rated. Vendors can also treat goods that they deliver in South
Africa to non-residents under the Export Incentive Scheme (EIS) (indirect exports) as zero-rated sup-
plies. Regulations promulgated on 2 May 2014 have made some changes to the EIS. These can be
found in Regulation No. 316 in Government Gazette No. 37580 should you require more information
about these changes (available online at http://www.sars.gov.za/AllDocs/LegalDoclib/SecLegis/LAPD-
LSec-Reg-2014-05%20-%20Regulation%20R316%20GG%2037580%202%20May%202014.pdf).
The vendors can claim the VAT (input) that they pay, even though the supplies that they
make are all zero-rated supplies.
Exempt supplies
Exempt supplies are supplies on which vendors levy no VAT, even if the suppliers rendering the ser-
vice are registered VAT vendors. The major difference between exempt supplies and zero-rated
supplies is that (unlike zero-rated supplies) SARS denies the vendors rendering exempt supplies any
input VAT deduction on any expenses that they incurred in making the exempt supplies.
Section 12 of the VAT Act provides for the following exempt supplies, among others:
• financial services and membership contributions to employee organisations, such as trade unions;
i exempt financial services include
– any exchange of currency;
– issue of a debt security or provision of credit;
– issue, payment, collection or transfer of ownership of a cheque or letter of credit;
– provision or transfer of ownership of a long-term insurance policy, including life policies
and endowment policies;
– issue or transfer of a share or member’s interest;
– provision of credit and paying of interest;
– contributions and proceeds from pension, provident, retirement annuity and medical aid
funds; and
– the buying or selling of any derivative or the granting of any option;
i exempt financial services exclude
– fee-based financial services (which means that the fees charged on any of the above
exempt transactions will not be exempt from VAT);
– a consideration payable for renewal or variation of financial arrangements relating to a
debt security;
– a merchant’s discount (being the discount on the charge made to merchants for accept-
ing a credit or debit card as payment); and
– supplying of a cheque book;
• goods and services donated by an association, not for gain, where at least 80% of the value of
the materials used consists of donated goods, for example, if old-age homes use old greetings
cards to make new ones and then sell them for fund-raising, the sale of the cards will not attract
VAT as long as the making of the new cards does not use less than 80% donated goods;
• residential accommodation supplied (i.e. the supply of a dwelling under a letting or hiring agree-
ment);
• selling or letting of land outside the Republic;
• transport of fare-paying passengers in a bus, or taxi, or by road or railway (this exemption does
not include air tickets, game viewing, free transport by a hotel, or courier services);
• qualifying educational services supplied by the State, a school, a public higher-education institu-
tion or certain other institutions in the Republic that are exempt from income tax in terms of sec-
tion 30 of the Income Tax Act;
• board and lodging supplied by a school, university, technikon or college;
• membership contributions made to employee organisations such as a trade union;
• childcare services supplied by a crèche or after-school centre.
The vendors may not claim the VAT (input) that they pay if the supplies that they make
are exempt supplies.
Deemed supplies
Registered vendors may sometimes be required to pay output tax even though they (or the company)
have not actually supplied any goods or services. The following are classified as deemed supplies:
• goods/services used for own use;
• certain fringe benefits granted to staff members;
• assets that are retained at the time of deregistering as a vendor;
• short-term insurance claims that have been paid out;
• leasehold improvements made for no consideration (with certain exceptions); and
• subsidies or grants received from the state.
The provision of the use of a company car by an employer to an employee constitutes a

fringe benefit and a deemed supply on which the employer is required to levy VAT.
9.2.6 Time of supply

The time of supply is important for VAT purposes, as it determines during which VAT period a vendor
must account for VAT. The general rule regarding the time of supply is that the vendor must account
for VAT at the earlier of:
• the date of the invoice; or
• the date on which the supplier receives the payment of the consideration.
There are also certain specific rules that apply in certain circumstances; but where no specific rule
exists, the general rule will apply.
The time of supply applicable to fringe benefits is the end of the month in which the fringe
benefit is to be included in the employee’s remuneration for employees’ tax purposes.
9.2.7 Value of supply

The value of the supply of goods or services is:
• the amount of money (where the consideration is in the form of money); or
• the open-market value of the consideration, less the amount of VAT included in the consideration
(where the consideration is not in the form of money).
The Act also includes rules for changing the value of the supply relating to the following:
• connected persons;
• instalment credit agreements;
• entertainment; and
• supplies for no consideration.
The value of the deemed supply of an employer providing the use of a motor car to an
employee (fringe benefit) is dependent upon whether or not the employer was entitled to
claim an input tax deduction for the company car. If the input tax deduction was denied
(e.g. the company car is a ‘motor car’ as defined), the value on which the employer has to
calculate VAT is the cost of the vehicle (excluding VAT) multiplied by 0,3% per month. If
the input tax deduction was not denied (e.g. if the car is a single-cab bakkie), the value
on which the employer has to calculate VAT is the cost of the vehicle (excluding VAT)
multiplied by 0,6% per month.
EXAMPLE 9.8
Required:
Calculate the output tax for the period ending 31 March.
Information:
Fancy Furniture Ltd manufactures furniture for selling to private persons. Fancy Furniture Ltd supplied the fol-
lowing information for the two months ending 31 March.
1. Fancy Furniture Ltd is a registered vendor on the invoice basis for VAT purposes in Category A.
2. All amounts include VAT at 14%, where applicable.
3. Fancy Furniture exports some furniture to other countries. These exports are only in respect of specific
orders from persons living in these countries.
4. Information relating to income for the two-month period ending 31 March is as follows:
R
Sales (RSA): cash 1 094 400
Sales (RSA): credit 596 220
Sales (international): cash (direct export) 70 680
Sales (international): credit (direct export) 519 840
Payments from debtors 12 768
Bad debts recovered from RSA debtors 5 700
During this time, Fancy Furniture Ltd made a company car available to the director. The motor vehicle is not a
single-cab bakkie and cost R706 800 (including VAT) on 31 January 2017, the date of purchase of the ve-
hicle.
Solution
Output tax R
Sales (RSA): cash R1 094 400 × 14/114 134 400
Sales (RSA): credit R596 220 × 14/114 73 220
Sales (international): cash (zero-rated) nil
Sales (international): credit (zero-rated) nil
Payments from debtors: invoice basis, already recorded on issue of invoice nil
Bad debts recovered R5 700 × 14/114 700
Fringe benefit (motor vehicle) R706 800 × 100/114 × 0,3% × 14/114 × 2 months 457
208 777
9.2.8 Input tax

Input tax is the VAT component of payments that a vendor makes to suppliers for goods and services
for the purpose of making taxable supplies. For example, when purchasing stationery or a computer,
which the vendor will use in making taxable supplies, the vendor can claim the VAT that he or she
paid on the purchase as input tax, and deduct it from output tax in order to calculate the VAT pay-
able or refundable.
Price Paid
= Expense + VAT
(consideration)
The VAT Act specifically prohibits the claiming of input tax on certain expenses, for
example, entertainment, club membership fees and certain motor vehicles. For more details
on the input tax claimable on a motor car refer to Interpretation Note No. 82.
Notional input tax

In order not to disadvantage the second-hand goods market or to distort market prices, a vendor
may claim an input tax deduction on acquiring second-hand goods from a non-vendor who is a resi-
dent of the Republic even though no VAT was actually charged by the supplier on this transaction.
One refers to this VAT, which the vendor may claim, as notional input tax. SARS will only allow this
notional input tax claim if the purchaser (vendor) has obtained the information as mentioned earlier in
this chapter.
The conditions under which a deemed or notional input tax deduction may be made are as follows:
• The goods must be ‘second-hand goods’ as defined in the VAT Act.
• The supply may not be a taxable supply (e.g. the goods are purchased from a non-vendor).
• The supplier must be a South African resident and the goods supplied must be situated in RSA.
• The purchaser must have made payment for the supply, or at least made part payment as an in-
put tax deduction is only allowed to the extent that payment has been made.
• The goods must be acquired by the vendor wholly or partly for consumption, use or supply in the
course of making taxable supplies.
• The prescribed records must be kept.
The notional input is calculated as 14/114 of the lesser of:
• the consideration paid for the goods; or
• the open market value.
Note the disallowance in certain instances of a notional input tax deduction for second-hand precious
metals as described previously. Where suppliers supplied taxable and exempt supplies to a vendor,
apportionment of certain input taxes must take place, and the vendor can only claim the portion re-
lated to taxable supplies.
EXAMPLE 9.9
Required:
Calculate the input tax for the period that ended 31 March.
Information:
Tony’s Toy Town had the following expenses for the two-month period that ended 31 March. The company is
a registered vendor on the invoice basis for VAT purposes and all amounts include VAT, where applicable. All
supplies are taxable supplies.
Expenses R
Purchases (all purchases are on credit) 812 307
Rent (February, March, April) 342 000
Bank charges 1 400
Purchase of luxury motor vehicle for private use by managing director 706 800
Entertainment of clients (incurred in the production of income) 11 400
Fuel 25 080
Oil 228
Salaries and wages 588 240
Auditor’s fee 27 360
Income tax paid 15 900
Telephone account 29 640
Bad debts 4 104
Lease payments: photocopy machine (lease agreement entered into two years ago on
1 March) 25 536
(continued)
Solution
Input tax R
Purchases: R812 307 × 14/114 99 757
Rent paid: R342 000 × 14/114 42 000
Bank charges: R1 400 × 14/114 172
Purchase of vehicle (no input tax – passenger vehicle) nil
Entertainment (input tax denied) nil
Fuel (zero-rated) nil
Oil: R228 ×14/114 28
Salaries (excluded from definition of ‘enterprise’) nil
Auditor’s remuneration: R27 360 × 14/114 3 360
Income tax paid (not a supply of goods or services) nil
Telephone: R29 640 × 14/114 3 640
Bad debts: R4 104 × 14/114 504
Lease payments (input tax claimable on agreement date; refer to Note) nil
149 461
Note: Lease payment: the vendor can claim VAT immediately as an input tax when he or she purchases as-
sets in terms of a lease agreement or instalment credit agreement, irrespective of using the invoice basis or
payments basis.
9.2.9 VAT and income tax

VAT has an impact on an enterprise’s income tax calculation. For example, SARS will calculate capital
allowances on the cost price of an asset, excluding VAT, if the vendor claimed it as an input tax credit.
When calculating the taxable income of an enterprise that is a registered vendor for VAT purposes,
one must exclude VAT, where applicable. Thus, all the expenses incurred and income received by a
registered VAT vendor should exclude the amount of VAT that this vendor received or paid, as it is
not the vendor’s money – it belongs to SARS.
One should clearly understand the interaction between the two Acts to ensure the correct application
and interaction of certain calculations.
EXAMPLE 9.10
Required:
For each of the following cases, calculate the amount that will be used for income tax purposes to calculate
capital allowances:
Inclusive
Part Asset Purchased by Purchased from New or used selling price
R
A Machine Vendor Non-vendor New 171 000
B Machine Vendor Vendor New 215 460
C Machine Non-vendor Non-vendor Used 36 480
D Machine Vendor Non-vendor Used 205 200
E Motor vehicle Vendor Vendor New 250 800
F Delivery vehicle Vendor Vendor New 159 600
(continued)
Solution
Part A
As the buyer purchased the machine from a non-vendor, no VAT would have been charged by the supplier;
therefore, the purchaser can base the income tax capital allowance on the full cost of R171 000. The pur-
chaser would also not be able to claim any input tax for VAT purposes on the purchase of the machine, as it
is a new machine (not a second-hand machine); thus, the notional input VAT deduction is not available.
Part B
As the buyer purchased the machine new from a vendor, VAT would have been included in the price at 14%.
The purchaser is also a VAT vendor, and as such would be able to claim R215 460 × 14/114 = R26 460 as
input tax for VAT purposes. For calculating the income tax capital allowance on the machine, the purchaser
will have to exclude the input VAT, and calculate the capital allowance based on R215 460 × 100/114 =
R189 000.
Part C
As a non-vendor purchased the machine from a non-vendor, no party would have claimed or charged VAT,
as neither party is a registered vendor for VAT purposes. Thus, the income tax capital allowance is based on
the full cost of R36 480.
Part D
As the buyer purchased the machine second-hand from a non-vendor, a deemed input tax claim of R205 200
× 14/114 = R25 200 for VAT purposes is implied (even though the price does not actually include VAT). The
cost for income tax purposes must, therefore, exclude the deemed VAT. The cost that the taxpayer can use
for income tax purposes will be R205 200 – R25 200 = R180 000.
Part E
SARS prohibits any input tax deduction on a motor vehicle for VAT purposes; therefore, the purchaser cannot
claim any input tax. This means that the cost for income tax purposes will include VAT. SARS will base the
capital allowance on a cost amounting to R250 800. Should the company (employer) give the use of this car
to an employee, a taxable fringe benefit will arise (refer to chapter 6), on which the employer will charge a
deemed output VAT.
Part F
The purchaser can claim input tax of R159 600 × 14/114 = R19 600. Therefore, the cost for income tax pur-
poses must exclude VAT. SARS will base the capital allowance on a cost amounting to R159 600 × 100/114 =
R140 000. Should the company (employer) give the use of this car to an employee, a taxable fringe benefit
will arise (refer to chapter 6), on which the employer will charge a deemed output VAT.
9.3 Employee-related taxes and levies

9.3.1 Employees’ tax
Employees’ tax, as mentioned in chapter 8, paragraph 8.2, is a system in terms of which an employ-
er, as an agent of SARS, deducts tax from the salaries it pays to its employees, after which the em-
ployer pays this tax over to SARS on a monthly basis. Chapter 2 focused on how employees’ tax af-
fects the individual, while chapter 8 focused on the requirements for registering as an employer, the
IRP5 certificates that SARS requires the employer to provide to its employees, and the employer’s
responsibility to calculate and pay employees’ tax. Paragraph 9.3 will consider the other employee-
related taxes and levies that SARS bases on payments made to employees (e.g. the skills develop-
ment levy and the Unemployment Insurance Fund contributions).
9.3.2 Skills development levy

The Department of Labour introduced the Skills Development Levy Act 9 of 1999 (the SDL Act) with
the aim of developing the skills of the South African workforce. The Act created Sector Education and
Training Authorities (SETAs) for various sectors of the economy. Employers have to register with
SARS, and SARS collects the SDL on behalf of the Department of Labour. The SETAs receive 80% of
the monthly levies and then provide incentives to the employers to make education and training
available to their employees. In terms of this Act, the employer should pay a levy to the SETA that is
concerned with the development of skills in the sector in which that employer falls.
Calculation of the skills development levy

The employer calculates the skills development levy (SDL) as 1% of the leviable amount. The leviable
amount means the total amount of remuneration determined in accordance with the provisions of the
Fourth Schedule to the Income Tax Act with a few differences. Employers with an annual payroll of
R500 000 or less are exempt from the payment of SDL. This means that these employers will not have
to pay over any levy at all to their SETA.
The levy does not affect the income earned by an employee. The employers must pay this
levy, but base it on the total remuneration that they pay to their employees.
Liability for the levy

Every employer as defined in the Fourth Schedule to the Income Tax Act is liable for SDL, with the
following exceptions:
• any employer for whom there are reasonable grounds to believe that the total amount of remune-
ration payable to all its employees during the following 12 months will not exceed R500 000; and
• an employer who does not employ any employees who are liable for normal income tax.
Payment of the SDL

SDL contributions are payable monthly, on/before the 7th of the month following the month for which
the SDL contributions accrue. The employer submits SDL contributions along with PAYE and UIF on
the EMP201 form.
SETAs are not registered vendors; therefore, they cannot claim any input tax on the SDL
contributions. The levy is a cost to the employer and SARS allows the employer to claim it
as a deduction for income tax purposes.
9.3.3 The Unemployment Insurance Fund

On 1 April 2002, two Acts, namely the Unemployment Insurance Act 63 of 2001 (which sets out the
benefits available) and the Unemployment Insurance Contributions Act 4 of 2002 (which sets out the
details of contributions to the fund), came into effect. The Department of Labour established UIF to
provide short-term relief to workers when they become unemployed or are unable to work owing to
illness, maternity or adoption leave, and to provide relief to the dependants of a deceased contribu-
tor. The Unemployment Insurance Contributions Act provides for the collection of the contributions to
the unemployment fund.
Registration
Every employer who pays or is liable to pay remuneration to an employee must contribute to the UIF
monthly. The Unemployment Insurance Contributions Act requires employers who are registered with
SARS for the purposes of employees’ tax or SDL to pay their UIF contributions to SARS. Employers
who are not required to register with SARS must pay their UIF contributions over to the Unemploy-
ment Insurance Commissioner.
The UIF Act does not apply to employers and their employees where an employee is
employed by the employer for less than 24 hours a month.
Application for registration for UIF purposes is made on an EMP101e application form (refer to chap-
ter 8).
Payment of contributions
Employers have to pay UIF contributions to SARS on a monthly basis, on/before the 7th of the month
following the month in which the UIF contributions accrue. If the 7th of the month falls on a Saturday,
Sunday or public holiday, the employer must make the payment no later than the last business day
before this day. Employers submit UIF contributions paid to SARS along with SDL and PAYE on a
simplified EMP201 form.
The EMP201 form (see Figure 9.6) is an employer payment declaration that requires employers to
indicate the total payment made, and give a breakdown of PAYE, SDL and UIF payment allocation
amounts. SARS will record these payment allocation amounts as the employer’s provisional liability
for each tax type for the period concerned. This means that the employer will only make one pay-
ment, rather than three separate payments for PAYE, SDL and UIF respectively.
Therefore, the employer will use each EMP201 form for a single period to declare how SARS should
allocate the payment for that period regarding each tax type. The payment reference number, a field
on the EMP201 form, will link the actual payment and the relevant EMP201 payment declaration.
The EMP201 will serve as a remittance advice. SARS will use the unique payment reference number,
as pre-populated on the EMP201 form, to link the actual payment with the payment allocation.
Figure 9.6: The simplified EMP201 form
An employer must inform the Commissioner of changes regarding the employer's contact details,
and/or any changes to employee remuneration details during the previous month, this includes new
appointments and termination of service. The employer must do this by completing the UI-19 form.
This form must be completed by and submitted before the seventh day of each month to ensure that
all its employees are registered/declared to the Commissioner.
Figure 9.7: The UI-19 form
Calculation of UIF contributions

UIF contributions constitute 2% (1% paid by the employee and 1% paid by the employer) of every
employee’s gross remuneration, excluding the following:
• commission;
• pension and annuity payments;
• employees who are employed for less than 24 hours per month;
• leave gratuities upon termination of service, and retrenchment packages;
• employees who receive remuneration under learnership agreements (registered under the SDL
Act); and
• foreign employees who are to be repatriated (i.e. they have to leave South Africa) upon termina-
tion of their service contracts.
There is a maximum threshold for UIF contributions. Currently, an employer will only deduct UIF from
remuneration up to an amount of R14 872 per month, which means that the maximum amount of UIF
that an employer can deduct from a person for the employee contribution will be R148,72 per month,
or R1 784,64 per annum.
One can make UIF payments electronically via uFiling (www.ufiling.co.za) – a free online service that
allows an employer to securely submit a company’s monthly UIF declarations and payments.
9.3.4 Compensation Fund for Occupational Injuries and Diseases

The Compensation for Occupational Injuries and Diseases Act 130 of 1993 (COIDA) provides for the
compensation of employees for injuries or diseases resulting directly from their employment. Employ-
ers make compulsory contributions to the Compensation Fund for Occupational Injuries and Diseas-
es (the Compensation Fund), from which benefits are paid for disability or death caused by occupa-
tional injuries or diseases sustained or contracted by employees in the course of their employment.
Casual employees and the dependants of a deceased employee are included as potential benefi-
ciaries of this fund.
The following persons are not subject to COIDA:
• national and provincial governments;
• local authorities who have exemption certificates;
• municipalities; and
• employers who are fully insured by a mutual association.
The Compensation Fund pays benefits in the form of:
• medical expenses;
• wages while the employee is incapacitated;
• part or whole disability payments; and/or
• death benefits to the next of kin of the deceased.
The Compensation Fund requires employers to pay the contributions due, notify the Commissioner of
any accident, maintain a first-aid service, provide transport for any injured employee, and keep the
necessary records.
Calculation of the amounts due

All employers (including contractors) must submit a statement, before 31 March each year, of earn-
ings paid to all their workers from the beginning of March to the end of February of the next year. The
Department of Labour calculates the annual assessment fee on workers’ earnings, and bases an
assessment tariff on the risks associated with the type of work done by workers.
Assessment fee = total workers’ pay r 100 × assessment tariff.
The Department bases the assessment tariff (reviewed annually) on the risks associated with a particular
type of work. Employers fall into one of over a hundred subclasses, each with its own assessment
tariff. If an employer’s accident costs are higher than those of other employers in the same subclass,
the Department of Labour may increase the assessment tariff; if costs are lower, they may reduce the
rate. Employers must pay the assessment fees in advance within 30 days of the date on the assess-
ment notice sent to employers each year.
The Compensation Commissioner may refund employers with a merit rebate if:
• employers actively prevent accidents;
• employers show favourable costs over a three-year cycle; or
• excess funds are available.
Submission of COID information

Employers may submit the form (see Figure 9.8) containing all the necessary information online. For
online submission, employers must go to www.labour.gov.za and under online services click on
‘Compensation Fund Return of Earnings Submission’.
(continued)
(continued)
(continued)
Figure 9.8: The W.As. 8 form
The Compensation Fund contributions limit

Employers must declare earnings up to the maximum amount of the Compensation Fund limit for each
employee. This means that where any employee earns over the limit, the employer must declare his or
her remuneration at this maximum limit. The Department of Labour adjusts the limit from time to time.
For the period 1 March 2017 to 28 February 2018, it has been set at R403 500 per annum. Remuner-
ation includes regular earnings before deductions, whether in money or in kind, for example:
• salaries and/or wages;
• cost-of-living allowances;
• bonuses (incentive or otherwise);
• overtime payments (regular);
• a guaranteed 13th cheque;
• a housing allowance;
• commission (only if given to an employee who also receives a basic salary, and not to agents or
contractors);
• cash value of meals and accommodation provided to an employee; and
• any other payment due to an employee in accordance with the employee’s contract of service.
It does not include the following:
• subsistence allowances (reimbursive in nature);
• travelling allowances (reimbursive in nature);
• occasional overtime;
• ex gratia payments;
• occasional payments;
• company contributions to medical aid, pension or provident funds; or
• once-off (non-recurring) payments made to an employee that fall outside the scope of his or her
service contract, or for tasks that fall outside the scope of the employee’s normal duties.
EXAMPLE 9.11
Required:
1. Beefy Burgers employs 20 people. Its monthly payroll amounts to R645 000. How much would the skills
development levy be for one month?
2. Home Helpers is a business employing four people. Its monthly payroll amounts to R30 000. How much
would the skills development levy be for one month?
3. Stix Furnishers employs Karen. Her gross remuneration amounts to R120 000 per annum. How much will
the UIF contributions made on her behalf be? How much of the contribution will the employer deduct from
her salary each month?
Solution
1. R645 000 × 1% = R6 450.
2. No skills development levy payment applies to this company, as the payroll is less than R500 000 per
annum.
3. 2% × R120 000 = R2 400. The employer will deduct R100 (R1 200 (R2 400 r 2) r 12) from her salary
per month.
This concludes the levies that an employer needs to pay in respect of his or her employees.
Paragraph 9.4 contains a discussion of the effects of importing and exporting goods in South Africa.
9.4 Customs and excise duty

Customs duty is a tax that SARS levies on imported goods. The reason for levying this duty is to raise
revenue and protect the local South African market and domestic industries from more efficient or
predatory competitors from abroad. SARS does this by controlling the flow of goods, especially
restricted and prohibited goods, into and out of the country.
Customs and excise legislation

The Customs and Excise Act 91 of 1964 will be replaced by three separate pieces of legislation;
namely the Customs Control (administration) Act 31 of 2014; the Customs Duty Act 30 of 2014; and
the Excise Duty Act (not yet drafted). SARS released the Customs Control Act and the Customs Duty
Act on 23 and 10 July 2014 respectively.
Although both the Customs Control Act and the Customs Duty Act have been promul-
gated, they will only take effect on a date determined by the President by proclamation in
the Gazette. This promulgation had not yet taken place at the time of writing this book.
As mentioned above, these Acts, when they come into operation, will replace the current Customs
and Excise Act and provide for new modernised customs legislation. The Customs and Excise
Amendment Act 32 of 2014, gazetted on 23 July 2014, will amend the 1964 Act to the extent that only
the excise provisions will still be in force. (This Act will thus be renamed the Excise Duty Act, 1964.)
The Customs Control Act establishes a customs control system for all vessels, aircraft, trains, vehicles,
goods and persons entering or leaving South Africa. It also prescribes the operational aspects of the
system. The Act will provide for the imposition, assessment, payment and collection of customs duties.
The third piece of legislation, the Excise Duty Act, will provide for the imposition, assessment and
collection of excise duties. This Act had not yet been released at the time of publication of this book.
The overhaul will allow for the modernisation of some aspects, such as the introduction of e-clear-
ances.
Types of customs duties

The duties on imported goods are mainly customs duties, which include additional customs duties
(ad valorem) on certain luxury or non-essential goods, and anti-dumping and countervailing
measures. SARS also levies VAT on imported goods when cleared by the applicable authorities for
consumption in South Africa.
Certain specific products also have a number of other levies imposed on them. SARS collects all
these levies at designated points of entry into South Africa (e.g. border posts, airports, harbours and
the postal service). SARS levies excise duty on locally manufactured goods.
9.4.1 Duties
Ordinary customs duty
SARS levies ordinary customs duty on imported goods (goods brought into South Africa), and usually
calculates customs duty on the value of the goods. One can find details on this duty in the Schedules
to the Customs and Excise Act. Goods such as certain meat and primary plastic products, certain
textile products and certain firearms attract rates of duty that SARS calculates as a percentage of the
value of these goods.
A wide range of luxury or non-essential goods, such as perfumes, firearms, arcade games, televi-
sions, audio equipment and cosmetics attract an additional duty. This duty is over and above the or-
dinary customs duty and is referred to as ad valorem customs duty.
Specific excise and customs duties

SARS levies specific excise duty on certain locally manufactured products. It bases this duty on the
specific quantity or value of the product and calculates this duty on the wholesale selling price of
products such as alcoholic beverages, tobacco products, fuel and certain products of the chemical
industry.
SARS also charges specific customs duties on imported goods of the same class as these local
products. It levies these specific customs duties so that the system treats imported goods in the
same manner as the locally produced goods.
Table 9.5 illustrates some of the excisable products and their respective specific duty rates, as
applicable from February 2017:
Table 9.5: Examples of items subject to excise duty

Product Excise duty
Malt beer R86,39/l
Unfortified wine R3,61/l
Fortified wine R6,17/l
Traditional African beer R7,82/l
Sparkling wine R11,46/l
Spirits R175,19/l of absolute alcohol
Ciders and alcoholic fruit beverages R11,46/l
Cigarettes R7,15/10 cigarettes
Cigars R3 298,56/kg
Pipe tobacco R182,24/kg
Cigarette tobacco R321,45/kg
Ad valorem duties
SARS levies ad valorem excise duty on certain luxury or non-essential items, and calculates this duty
on the wholesale selling price of the items. Items that attract ad valorem excise duty include: per-
fumes, leather and fur clothes, air-conditioners, certain domestic appliances, vending machines,
cordless telephone handsets, fax machines, loudspeakers and amplifiers, recordings, cell phones,
cameras and lenses, radios, televisions, certain motor vehicles and motorcycles, personal watercraft,
sunglasses, binoculars, projectors, firearms, video games, games of skills or chance and golf balls.
SARS levies ad valorem customs duty on imported goods of the same kind as the above, so that the
system treats imported goods in the same manner as the locally produced goods.
Manufacturers of these products have to approach SARS for licensing purposes.
The following are some of the excisable products and their respective ad valorem duty rates:
Note: The list is not exhaustive.
• aeroplanes and helicopters (450 kg – 5 000 kg) (from 1 October 2012) 7%
• motorboats and sailboats (longer than 10 m) 10%
• gaming machines and TV sets 7%
• motorcycles (200 – 800 cc) 5%
• firearms 7%
• perfumes 7%
• motor vehicles (formula based) max 25%
• fireworks 7%
• air-conditioning machines 7%
• refrigerators/freezers 7%
• dish-washing machines (domestic) 7%
• cell phones and video cameras 7%
• magnetic tape recorders 7%
• video equipment, hi-fi equipment, optical lenses and
photographic/cinematographic equipment 7%
Anti-dumping and countervailing duties

SARS levies these duties on goods it considers as dumped in South Africa, and on imported goods
that are subsidised by the other country’s government. The reason for this levy is that people will
choose to buy these goods instead of South African produced items, as these goods will be cheaper
than similar locally manufactured goods, and this is not good for the South African economy.
SARS will levy these duties either on an ad valorem basis (percentage of the value of the goods), or
as a specific duty (percentage per, e.g., unit, kilogram, litre). The level and type of duty imposed is
subject to the customs value of the goods, the volume and the classification.
Carbon dioxide (CO2) emission levy

From 1 September 2010, the environmental levy (CO2 levy) became payable by purchasers of new
passenger motor vehicles with CO2 emissions exceeding 120 g/km. From 1 March 2011, SARS
extended the levy to include new passenger motor vehicles for the transport of goods with CO2
emissions exceeding 175 g/km. The objective of the levy is to offset carbon dioxide emissions and
encourage road users to buy smaller, more fuel-efficient vehicles in an effort to become more energy
efficient and environmentally friendly. This levy is self-assessed by licensed manufacturers every
quarter by completing an excise return and is then paid over to SARS. For more information, see
http://www. sars.gov.za/AllDocs/OpsDocs/Policies/SE-EL-06%20%20CO2%20on%20new%20Motor%
20Vehicles%20Manufactured%20in%20South%20Africa%20-%20External%20Standard.pdf
9.4.2 VAT on imported goods

Goods that are imported into South Africa are not only subject to customs duties (including additional
ad valorem duties on certain luxury and non-essential items) and anti-dumping and countervailing
duties, but they are also subject to VAT. SARS levies VAT at the standard rate on imported goods
that are cleared for home consumption (except for a few exemptions). The value on which SARS
charges VAT equals the customs value of the goods, plus any duty levied in terms of the Customs
and Excise Act, plus 10% of the customs value.
EXAMPLE 9.12
Required:
How much would Jamie have to pay in duties and taxes if the customs duty on art amounts to 25%?
Information:
Jamie imports art from Kenya. His last import cost him R55 000. He declares this amount when the art arrives
at the airport, and the applicable authority cleared his art for home consumption.
Solution
Customs duty: R55 000 × 25% R13 750
VAT on imported goods: (R55 000 + (R55 000 × 10%)) × 14% R 8 470
VAT on imported goods is calculated as follows:

= [Customs duty + Any customs duties levied on the goods + (Customs duty value +
10% thereof)] × 14%
= Value × 14%
= VAT payable
The value of goods that are imported from Botswana, Lesotho, Namibia or Swaziland (BLNS coun-
tries) will not be increased by the 10%, and SARS does not levy customs duty on goods from these
countries.
EXAMPLE 9.13
Required:
What duties or taxes will Stephanie be subject to when she re-enters South Africa through the border post?
Information:
Stephanie travels to Lesotho to buy some beadwork for her curio shop, and spends R10 000.
(continued)
Solution
As the goods are from Lesotho, there will be no customs duty. However, Stephanie will have to pay VAT, but
she will be able to claim it as an input tax.
VAT payable = R10 000 × 14% = R1 400.
VAT on imported goods from BLNS countries is calculated as follows:

= [Customs duty value + any customs duties levied on the goods] × 14%
= Value × 14%
= VAT payable
VAT on imported goods (from countries other than BLNS countries) is calculated as
follows:
= [Customs duty value + any customs duties levied on the goods + (Customs duty value
× 10%)] × 14%
= Value × 14%
= VAT payable
When a person imports goods for a business, this person can claim the VAT paid as an input tax. The
bill of entry, plus a receipt issued by the relevant Customs office, will serve as proof that this person
paid the VAT.
9.4.3 Customs value

The General Agreement on Tariffs and Trade has established six valuation methods. SARS values
most goods by using method 1, which values goods at the actual price paid or payable by the buyer
of the goods.
SARS looks very particularly at the relationship between the buyer and seller, and this can result in
the price paid for the goods being increased for the purpose of determining a customs value.
9.4.4 Arrival of goods in South Africa

Goods arrive in the Republic via one of the following modes of transportation: air, sea, road, rail or
post. In order for Customs to safeguard any revenue due to the State and to ensure compliance with
national legislation, the importer must declare to Customs what he or she has brought into the coun-
try and the mode of transportation used. National legislation allows an importer/agent seven days
from the time the goods land in the Republic in which to clear goods. Customs may remove goods
that are not declared or cleared within this period, and detain them in a state warehouse. One should
note that certain goods will require an import permit, which the importer/agent must produce at the
time of clearance.
Arrival of goods
Legislation states that the master of any ship or the pilot of any aircraft must, on arrival in the Repub-
lic, make due report and make a declaration attesting to the truth of the report. The reports men-
tioned in the legislation may take the form of official documents, as in the case of shipping vessels
and aircraft carrying passengers as well as goods. The necessary supporting documents, as speci-
fied by Customs, must accompany the customs declaration for the importation of goods. Failure to
furnish these reports/declarations may lead to the imposition of penalties and to Customs detaining or
seizing the goods.
Goods arriving in the Republic may only enter through approved entry points (entry points in terms of
section 6 of the Customs and Excise Act, 1964 and to be contained in sections 31 and 34 of the Cus-
toms Control Act). A list of places can be obtained from SARS. These places include approved places
of entry for sea, air, post, road and rail clearances.
One may bring goods into the Republic and declare them in accordance with one of the following
processes:
• home consumption, i.e. direct entry into the Southern African Customs Union (SACU) (duty is paid
on importation or under rebate/relief from duties under specific circumstances/conditions); or
• warehousing (pending payment of duty or re-export); or
• transit through South Africa; or
• temporary admission into the South African Customs Union (SACU), including inward processing
(for manufacturing purposes and subsequent exportation).
Clearance of goods
SARS requires the importer/agent to complete the bill of entry declaration. It is the responsibility of
the importer/agent to ensure the full and accurate completion of the declaration, and to provide all
supporting documents. Section 39 of the Customs and Excise Act, 1964 (to be contained in sec-
tion 176 of the Customs Control Act, 2014) specifies the required supporting documents in detail.
The clearance process includes accepting and checking the goods declaration against the docu-
ments produced (invoice, bill of lading, certificate of origin, permits, etc.), examining of the goods (if
necessary), and the assessment and collection of duty and VAT. Customs may require additional
information and may request samples. Customs will detain goods for the Departments of Health, Agri-
culture and other government departments. The relevant government department ensures compli-
ance with other applicable laws, regulations and rules.
Customs warehouses
Once goods have landed in the Republic, the importer or owner may choose to delay the payment of
duties. Customs places such goods in a Customs-controlled bonded warehouse for a specified period.
Although Customs does not own these warehouses, it strictly controls the goods deposited therein,
and duties and VAT become payable on removal of such goods from these warehouses.
One may also export the goods from these warehouses – an example of this would be a duty-free
shop. The Customs warehousing procedure, largely, is the facilitator of trade. Customs, furthermore,
provides for manufacturing warehouses. These warehouses contain rebate stores, which Customs
inspects. The reason for such inspections is to monitor the use of the rebated goods that people im-
port subject to certain conditions, for example, materials in rolls for the manufacture of infants’ gar-
ments. If the importer adheres to the conditions of the rebate item, the importer need not pay all or
part of the duties. Customs also manages the SA State Warehouse, where goods are placed if un-
cleared, prohibited, seized or abandoned. The client pays the State Warehouse rent for the storage
of these goods.
9.4.5 Customs declaration

At the time of importation and exportation, the declaration made to Customs on a bill of entry must be
accurate and correct. The importer/exporter must keep all declarations and the related documents
for a period of between two and five years.
When Customs finds errors and inaccuracies or false declarations, it can charge penalties of up to
three times the value of the goods, as well as seize the goods. Where there is fraud, it may prosecute
the person concerned.
Persons must register with SARS if they import and export goods for commercial reasons. Those who
import or export non-commercial goods do not need to register, provided that the importations are
limited to three a year and each importation is valued at less than R20 000.
9.4.6 Goods not subject to customs

The following exemptions apply to goods entering South Africa:
J Non-residents
Sporting and recreational equipment and personal effects brought into South Africa, either ac-
companied or unaccompanied by non-residents for their own personal use during their stay in
South Africa, will not be subject to customs duty.
J Residents
Sporting and recreational equipment and personal effects exported by residents for their own use
while overseas, and subsequently brought back into South Africa, will not be subject to customs
duty.
J Specific goods
SARS grants residents and non-residents certain allowances when bringing certain items into
South Africa. One can divide these allowances into two categories, namely a) the duty-free allow-
ances and b) the flat-rate allowances.
(a) Duty-free allowances

The duty-free allowances consist of the following three allowances:
(1) Duty-free allowance

(a) Travellers from international countries are entitled to import goods, excluding consumable goods
of up to a value of R5 000 per person (crew members including the master / pilot are only en-
titled to a duty free allowance of R700 per trip) without paying any duty or tax thereon; and
(b) Travellers from the SACU member countries do not pay Customs duties and are entitled to a VAT
exemption on goods up to the value of R25 000. This R25 000 VAT exemption for travellers from
the SACU member countries will be granted once during the thirty (30) day cycle after an ab-
sence of 48 hours or more from the country, provided that the goods do not exceed R25 000.
Children under the age of 18 years may also claim duty-free allowances (except for cigarettes and
alcohol), regardless of whether they are accompanied by their parents or not. As mentioned above,
Customs only grants this allowance once per person in a 30-day cycle after an absence of 48 hours
or more from the country. For example, a person returning after a second absence of 48 hours or
more within 30 days will not receive any allowance. Similarly, a person will not be entitled to this allow-
ance after an absence of 36 hours.
(2) Consumable goods

Travellers can bring certain consumable goods into South Africa as accompanied baggage, and
SARS will not charge customs duty or VAT on these goods. However, there are limits on the quanti-
ties of the goods that people can bring into South Africa, as follows:
• wine – 2 litres per person
• spirits and other alcoholic beverages – 1 litre per person
• cigarettes – 200 per person
• cigars – 20 per person
• cigarette or pipe tobacco – 250 g per person
• perfume – 50 ml per person
• eau de toilette – 250 ml per person
SARS will assess any of these goods that are brought into South Africa in larger quantities than stated
above for customs duty in terms of the applicable rates, and VAT will be payable thereon.
(3) Handmade articles for commercial purposes

Customs allows importation of handmade articles made of wood, leather, plastic, stone, glass, etc.,
by South African Custom Union (SACU) or Southern African Development Community (SADC) mem-
bers without the payment of duties and taxes, as long as the goods do does not exceed a mass of
25 kg in total. Customs grants this allowance once per person during a 30-day period.
(b) Flat-rate allowances

Over and above the allowance for consumable goods and the duty-free allowance of R5 000, pas-
sengers (arriving from outside the SACU) may elect to pay customs duty at a flat rate of 20% on any
additional goods they have acquired abroad if the total value of these additional goods does not
exceed R20 000. This allowance will be granted an unlimited number of times during the 30-day cycle
after an absence of 48 hours or more from the country, provided the value does not exceed
R20 000. For example, if a person paid the 20% flat rate on goods to the value of R6 000 and then
returns from a second absence of 48 hours or more, this person will be allowed to pay the flat rate on
the remainder of the allowance (goods up to the value of R14 000).
For more details on these allowances, refer to the SARS Traveller’s Guide – Customs requirements
when entering and leaving South Africa. This Guide can be found on the SARS website at http://www..
sars.gov.za/AllDocs/OpsDocs/Guides/Customs-G001%20-%20Travellers%20Guide%20-%20External
%20Guide.pdf
9.4.7 Customs offences

The primary task of the Customs office is to ensure compliance with Customs and related legislation.
Therefore, it needs powers to investigate and, where appropriate, impose penalties on those who are
non-compliant with the law. Customs has identified three categories of offences.
Types of offences
Administrative
These are offences where there are no revenue prejudices to the state; however, the declarant has
failed to comply with the administrative provisions of the Act.
Less serious (Category 2 offence in terms of the Customs Control Act)

These are offences where Customs can reasonably presume that there was no deliberate attempt on
the part of the offender to cause prejudice to the state. In these instances, there may be revenue
prejudices to the state. These penalties may be termed ‘preventative penalties’; in other words, Cus-
toms imposes the penalty to avoid recurrence of the offence.
Serious (Category 1 offence in terms of the Customs Control Act)

Offences where there is evidence of intentional conduct by the declarant to achieve a specific objec-
tive, namely the smuggling of goods and/or the evasion of duty, in the knowledge that the conduct,
action or declaration is unlawful. Customs also considers gross negligence on the part of the declar-
ant as a serious offence.
Penalty application
Customs does not impose penalties as a source of revenue for the state, but merely as a measure to
ensure compliance with the law. Sections 78–96 of the Customs and Excise Act of 1964 (Chapters 11 and
12 of the Customs Duty Act and Chapters 39 and 40 of the Customs Control Act) deal with penal
provisions and, depending on the nature of the offence, Customs could impose a penalty as high as
three times the value of the goods (or R1 million or a higher amount if it the offence falls into Cat-
egory 1). Should Customs institute legal action, the outcome could be imprisonment. South African
Customs does, however, take factors such as human error and administrative error into account.
Where it identifies wilful violations, such violators will be severely penalised.
Appeal procedures
In the interest of declarants, SARS provides an internal procedure for appeals in Customs matters. In
these instances, Customs will consider mitigating circumstances. It will consider the extent of the
offence against the available evidence, and will make decisions as to whether wilful, gross negli-
gence or simply an administrative error has occurred. After imposition of penalties, the declarant may
elect that the Commissioner deals with him or her and agree to abide by this decision. If the declar-
ant elects this option, he or she may make use of the alternative dispute resolution procedure or may
lodge an appeal against the initial decision to SARS within 30 working days from the date the tax-
payer became aware of the decision. If the declarant is still not satisfied with the outcome, he or she
may lodge a further appeal, should there be additional mitigating factors for consideration. The de-
clarant also has the further recourse of an additional appeal, which he or she may lodge with the Min-
ister’s Office or the High Court of South Africa.
9.5 Other taxes and levies

Besides the taxes discussed above, various other taxes and levies are applicable.
9.5.1 Transfer duty

People have to pay transfer duty to the SARS Commissioner in terms of the Transfer Duty Act 40 of
1949 on the transfer of fixed property in South Africa within six months of the date of a transaction. If
the duty remains unpaid, SARS will charge interest at a rate equal to 10% per annum of the outstand-
ing duty, calculated in respect of each completed month in the period from the period that it is due to
the date of payment.
Property subject to transfer duty

Property includes a real right in land, certain leases on property, and a share in an entity or trust with
regard to the portion of the interest that can be attributed to residential property. A person will also
have to pay transfer duty on the sale of the right to use property in terms of the definition of ‘trans-
action’ according to the Act. SARS will levy transfer duty if a person (including a company, close cor-
poration or trust) buys property. Note that the purchaser is liable to pay the tax in terms of section 3 of
the Act.
The following rates apply to transfer duty, applicable to both natural and legal persons, on trans-
actions which are not subject to VAT, for purchase agreements concluded on or after 1 March 2015:
Table 9.6: Transfer duty rates

Consideration Rate
R0–R900 000 0%
R900 001–R1 250 000 3% of the value above R900 000
R1 250 001–R1 750 000 R10 500 + 6% of the value above R1 250 000
R10 000 001 and above R933 000 + 13% of the value above R10 000 000
Transfer duty and VAT

If a business is a registered vendor for VAT, SARS will have to take the interaction between VAT and
transfer duty into account. The rules for this interaction can be summarised as follows:
• A transaction pertaining to fixed property that is subject to VAT will not be subject to transfer duty.
• When the seller is a registered vendor for VAT and the purchaser is not, the seller must pay VAT
on the transaction at a rate of 14%.
• When the purchaser is a registered vendor for VAT and the seller is not, the purchaser must pay
transfer duty, but he or she will be able to claim the transfer duty payment as a deemed notional
VAT input claim. SARS will defer this claim to the extent of actual payment and will defer it further
until registration of the fixed property in the vendor’s name.
EXAMPLE 9.14
Required:
Calculate the following amounts, if applicable, for each of the transactions (A to E) below:
• the output tax that the seller may charge;

• the input tax that the purchaser may claim; and/or
• the transfer duty that the purchaser will have to pay.
Information:
The following transactions all relate to the sale of fixed property (all the amounts include VAT, where applic-
able):
Part Purchaser Seller Amount of sale Amount paid in cash

(natural person)
A Vendor Non-vendor R 750 000 R 750 000
B Non-vendor Vendor R1 400 000 R1 400 000
C Vendor Vendor R 970 000 R 500 000
D Vendor Non-vendor R1 300 000 R1 300 000
E Vendor Non-vendor R 450 000 R 250 000
Solution
Part A
The seller will not charge output tax, as the seller is not a registered vendor for VAT.
The purchaser can claim a deemed input tax of R750 000 × 14/114 = R92 105; however, SARS will defer this
claim until registration of the fixed property in the vendor’s name, and to the extent of actual payment.
Part B
As the seller is a registered vendor for VAT, the seller will charge output tax of R1 400 000 × 14/114 =
R171 930.
As the purchaser is not a registered vendor for VAT, he or she will not be able to claim any input tax.
As the sale is subject to VAT, no transfer duty will be payable on the transaction.
Part C
As the seller is registered for VAT, the seller will charge output tax of R970 000 × 14/114 = R119 123.
As the purchaser is a registered vendor for VAT, he or she may claim input tax of R119 123.
However, both the output tax declared and the input tax actually claimed in the current tax period will be lim-
ited to the amount of cash that has been paid, i.e. R500 000 × 14/114 = R 61 404. The balance of R119 123
less R61 404 will only be declared/claimed once the outstanding amount of R470 000 is paid.
As the transaction is subject to VAT, no transfer duty is payable.
Part D
As the purchaser is a registered vendor for VAT, he or she can claim a deemed input tax of R1 300 000 ×
14/114 = R159 649; however, SARS will defer this claim to the extent of actual payment, and will defer it fur-
ther until registration of the fixed property in the vendor’s name.
(continued)
Part E
The purchaser can claim input tax equivalent to R450 000 × 14/114 = R55 263; however, SARS will defer this
claim to the extent of actual payment and will defer it further until registration of the fixed property in the ven-
dor’s name. As the purchaser only paid R250 000 of the R450 000, he or she can only claim R30 702
(R55 263 × 250 000/450 000) as an input tax deduction (assuming the property has been registered in the
purchaser’s name).
9.5.2 Securities transfer tax

On 1 July 2008, SARS abolished the stamp duty on the transfer of unlisted shares and the uncertified
securities tax on listed shares and replaced it with securities transfer tax (STT). SARS levies STT as a
tax on every transfer of a security. A security, in essence, means any:
• share in a company;
• member’s interest in a close corporation; or
• right or entitlement to receive any distribution from a company or close corporation.
Only securities issued by the following entities are taxable:
• companies incorporated, established or formed inside the Republic; and
• companies incorporated, established or formed outside the Republic, which are listed on a South
African exchange.
Rate of STT
SARS levies this tax at a rate of 0,25% of the consideration, closing price or market value (whichever is
the greater) on the transfer, cancellation or redemption of any listed or unlisted share, member’s in-
terest in a close corporation (CC), or cession of right to receive distributions from a company or a CC.
Date and method of paying STT

On listed securities, the responsible party must pay the STT by the 14th of the month following the
end of the month during which the transfer occurred.
On unlisted securities, the responsible party must pay the STT by the end of the second month fol-
lowing the end of the month during which the transfer occurred. Thus if the unlisted securities were
transferred on 1 July of a year, the STT would need to be paid by 30 September of that year.
The only method of payment will be through the SARS e-STT system. A person may not use revenue
stamps or an impressed stamp to pay STT. If STT is not paid in full within the prescribed period,
SARS will impose interest at the prescribed rate, as well as a 10% penalty.
In terms of the Companies Act 71 of 2008, a duty of 0,5% is payable on the creation of, or
increase in authorised share capital.
9.5.3 Turnover tax

On 1 March 2009, SARS introduced a simplified turnover-based tax system, known as turnover tax (TT)
for micro-businesses. A micro-business is a business with a ‘qualifying turnover’ not exceeding
R1 million for a year of assessment, and a business that SARS does not specifically disqualify from
making use of the TT system. Micro-businesses that render ‘professional services’ and services
under employment-like conditions will not be allowed to access the TT system. The TT system will be
available for sole proprietors (individuals), partnerships and incorporated businesses.
The objective of this tax is to reduce the tax compliance and administrative burden by simplifying and
reducing the number of returns that businesses have to file.
A typical business may currently be liable for submitting the following returns to SARS:
• value-added tax (VAT);
• income tax;
• provisional tax;
• capital gains tax (CGT); and/or
• dividends tax.
Originally, all these taxes were to be replaced (to a certain extent) by the TT system. However, since
1 March 2012, a business wishing to register for TT can elect to register for, or remain on the VAT
system. SARS allows a business to be registered for VAT and the TT system, because many busi-
nesses need to be registered for VAT to be viewed as credible by their clients.
The TT system does not provide relief in respect of payroll taxes/levies such as employ-
ees’ tax and, UIF and SDL contributions.
Overview of how the TT system works and how to register for it

The TT system is elective (not compulsory). This effectively means that a micro-business can volun-
tarily exit the TT system at the end of a year of assessment; however, SARS will not allow these micro-
businesses to re-enter the TT system after that, as it was not designed to be a ‘lesser of’ system that
allows taxpayers to switch between the normal and turnover tax systems on an opportunistic basis to
pay less tax.
A micro-business that opts for the TT system must complete its application before the beginning of a
year of assessment. New businesses must apply within two months from the date of commencement
of business activities. Application is made by completing a turnover tax application form (TT01) if the
application is done online or a TT01(a) if the form is completed manually – see Figure 9.9.
Figure 9.9: Example of questions to complete before the TT01 form can be completed
(continued)
Figure 9.10: A TT01 form

It must be noted that, to the extent of SARS uncovering a wholly unregistered informal
business, SARS will have the power to register this business for turnover tax or income
tax. This power will ensure that taxpayers cannot alternate between both tax systems as a
mechanism to artificially slow the audit process. SARS will also have the power to note
certain details of businesses and their owners if those businesses are not legally com-
pelled to register for tax and submit tax returns.
A micro-business that is registered for TT must notify SARS within 21 days of its ‘qualifying turnover’
exceeding R1 million for the year of assessment. Where there are reasonable grounds to believe that
the amount will be exceeded; SARS will then deregister the business from the TT system, unless
SARS is of the view that the excess will be small and temporary. Deregistration and liability for VAT
will take effect from the beginning of the month following the month in which the ‘qualifying turnover’
exceeded, or was likely to exceed the R1 million threshold.
SARS may also deregister a micro-business from the TT system where it is satisfied that the ‘taxable
turnover’ of the micro-business is sufficient to render the business liable to register for VAT. SARS
must consult with the micro-business before deregistering it on this basis.
Rate of turnover tax

SARS calculates TT by simply applying a sliding tax rate (refer to the table below) to the ‘taxable
turnover’ of the micro-business. The ‘taxable turnover’ consists of the turnover of the business for the
year of assessment with a few specific inclusions and exclusions.
Table 9.7: The rates of TT for the 2017/18 year of assessment payable by a micro-business
Turnover Rate
R0–R335 000 0%
R335 001–R500 000 1% of each R1 above R335 000
R500 001–R750 000 R1 650 + 2% of the amount above R500 000
R750 001–R1 000 000 R6 650 + 3% of the amount above R750 000
Date and method of paying turnover tax

SARS will levy TT annually on a year of assessment that runs from the beginning of March to the end
of February of the following year. It will include two six-monthly interim (provisional) payments (TT02
form – see Figure 9.11) and one final payment on assessment, where necessary.
An annual turnover tax return (TT03 – see Figure 9.12) must be completed (it must be noted that this
form is not available for completion or submission electronically). Refer to the SARS Guide for Com-
pletion of the Annual Turnover Tax Return and the Comprehensive Guide to Turnover Tax on the
SARS website at www.sars.gov.za/TaxTypes/TT/Pages/default.aspx, or the Sixth Schedule to the In-
come Tax Act for more details regarding this tax and qualifying requirements.
(continued)
Payment of VAT and employees’ tax by a micro-business

It must also be mentioned that a qualifying micro-business is entitled to pay its VAT and employees’
tax liabilities twice a year, instead of the normal monthly or bi-monthly payment periods. This should
reduce the micro-business' compliance costs.
9.5.4 Proposed health promotion levy (sugar tax)

A health promotion levy (sugar tax) will be introduced (from 1 April 2018) on sugar-sweetened bever-
ages, such as, for example, coke. The reason for the introduction of the tax is to try and help reduce
excessive sugar consumption, which is linked to high instances of heart disease, obesity, cancer and
diabetes. These diseases put strain on the South African health care system both from a financial as
well as a human resources perspective. South Africa is said to have the worst obesity ranking in sub-
Sahara Africa and the expected growth in consumption of sugar-sweetened beverages could lead to
an ever increasing rise in obese adults, South Africa is not the only country that has introduced this
type of tax; other countries, such as Denmark, Finland, France, Hungary, Ireland, Mexico and Nor-
way, have already levied taxed on sugar-sweetened beverages.
The design of the tax has been revised since it was first mentioned and the tax rate is now set at 2,1c
a gram of sugar content (down from the originally mentioned 2,29c per gram). A new threshold has
been included so the tax will only apply to sugar content in excess of 4g/100ml in each drink. So this
means that a 330 ml Coke can, containing just over 8 teaspoons of sugar will cost an extra 46c. For
the time being, milk and 100% fruit juices have been exempted from the tax but the Treasury has said
that the inclusion of these items will be considered in the future.
9.6 Summary
One can summarise VAT as follows:
Sale of goods or services OUTPUT VAT
Standard-rated Zero-rated Exempt supplies

supplies supplies
(listed in the VAT Act in
(all supplies except zero- (listed in the VAT Act in section 12)
rated and exempt) section 11)
Output VAT @ 14% Output VAT @ 0% No output VAT
Less: Input VAT No input VAT
Negative Positive
SARS owes the VAT The VAT vendor owes

vendor SARS
There are also various other taxes that SARS can confront a person with, for example:
• employee-related taxes and levies:
i employees’ tax;
i skills development levy (SDL);
i Unemployment Insurance Fund (UIF);
i Compensation Fund for Occupational Injuries and Diseases (OID Fund);
• customs and excise duty;
• transfer duty;
• securities transfer tax (STT);
• turnover tax (TT); and
• proposed sugar tax.

1. Explain, in your own words, what you understand by the following:
• registration of a vendor;
• input and output tax; and
• invoice and payments bases.
2. Explain the differences between standard, exempt and zero-rated supply of goods and services,
and give an example of each.
3. Who is liable to pay skills development levies?
4. When and how should the responsible party pay skills development levies?
5. Who is liable to pay Unemployment Insurance Fund contributions?
6. What should the responsible party exclude from gross remuneration when calculating the unem-
ployment insurance levies?
7. What is the maximum amount of UIF that the responsible party can deduct from an employee’s
remuneration?
8. How and when must the responsible party pay UIF levies?
9. In what forms does the Compensation Fund pay benefits?
10. How does one calculate the contributions that are due to the Compensation Fund?
11. When does one apply securities transfer tax?
12. Name the method(s) of paying securities transfer tax.
13. Explain the difference(s) between customs and excise duties.
14. Name the different types of customs and excise duties.
15. How does one calculate VAT on imported goods from countries other than BLNS countries?
16. To whom does turnover tax apply?
17. How do you register for the turnover tax?
18. How do you deregister for the turnover tax?
19. What special tax regime will the following individuals be allowed to use?
(a) an individual (sole proprietor) with an annual turnover of R800 000; and
(b) an individual conducting a business via a Close Corporation, making an annual turnover of
R800 000.
20. Why is South Africa considering introducing a sugar tax?
21. Under what circumstances and from when does a non-executive director need to register for
VAT?
Question 22
Required:
Calculate the VAT payable by/refundable to Debbie’s Darning for the tax period ending 28/9 February. Ignore
any apportionment of VAT for the purposes of this example.
Information:
Debbie’s Darning is a sole trader run by Debbie, who mends clothes and sews outfits to order, and makes
costumes for the local theatre.
Debbie’s Darning is a registered VAT vendor on the payments basis. All of the amounts below include VAT at
14%, where applicable.
The following is an extract from the enterprise’s cash book for the period 1 January to 28/29 February:
R
Cash receipts
Capital deposited by owner 500
Sales (in South Africa) 79 800
Interest on current account 650
Cash payments
Purchases of material 34 200
Salaries – employees 10 000
– members 24 000
Cash purchase: sewing equipment 6 840
Advertisements 1 710
Rent of premises; prepaid to 30 December 9 600
Entertainment costs 4 400
Fuel 350
Additional information
1. On 1 February, Debbie purchased a delivery vehicle (not a ‘motor car’ as defined in the VAT Act) on
credit for R45 600 (14% VAT included) and the first instalment of R5 600 is payable on 1 March. SARS al-
lows wear and tear at 20% per annum, calculated according to the straight-line method.
2. Debtors in respect of sales amounted to R45 000 on 28/9 February.
3. Creditors' balances on 28/9 February were as follows:
R
In respect of material purchases 5 700
In respect of advertisements 1 254
4. On 28/9 February, the cost price of the material on hand amounted to R14 820.
Notes
Question 23
Required:
Calculate the VAT payable by/refundable to Super Sweets for the tax period ending 31 December, if Super
Sweets is a registered VAT vendor in terms of the invoice basis. Ignore any apportionment of VAT for the pur-
poses of this example.
Information:
Super Sweets supplied the following information for the period 1 November to 31 December:
Cash receipts
Note R
Sales – RSA 1 810 000
Sales – Zimbabwe (direct export) 200 000
Sales – Lesotho (direct export) 50 000
Debtors – RSA 100 000
Debtors – Zimbabwe 30 000
Cash payments
Purchases – stock 1 650 000
Creditors – stock 200 000
Bank charges 1 200
Stationery 2 15 000
Office furniture 3 40 000
Entertainment expenses 5 000
Fuel 8 000
Interest 3 000
Notes:
1. Debtors, creditors and stock 31 October 31 December

Debtors – RSA sales 150 000 120 000
Debtors – Zimbabwe sales 50 000 60 000
Stock on hand 50 000 60 000
Creditors – stock purchases 300 000 350 000
2. Included in the amount is stationery to the value of R1 500 that Super Sweets purchased from a non-
registered vendor.
3. Included in the amount is used furniture to the value of R5 000 that Super Sweets purchased from a pri-
vate person.
4. All amounts include VAT at 14%, where applicable. Super Sweets received all the necessary tax invoices
issued.
Answer
Solutions to
‘Test your knowledge’ Questions & Examples
Please note: Final amounts in all answers to questions are rounded off to the nearest rand.
Chapter 1: Solutions to ‘Test your knowledge’

1. From 1 April to 31 March.
2. Fiscal year.
3. A year of assessment.
4. From 1 March to 28/29 February.
5. It describes how government will raise money and how it will spend that money.
6. Minister of Finance – at time of print this was Malusi Gigaba
7. A bill.
8. Different types of tax:
• normal tax – this consists of both income tax and capital gains tax;
• income tax (including capital gains tax and certain withholding taxes);
• value-added tax (VAT);
• estate duty;
• donations tax;
• turnover tax (alternative regime of tax for micro businesses);
• excise duty;
• customs duty;
• transfer duty;
• air passenger tax;
• diamond export levy;
• mineral and petroleum royalties;
• tax on retirement funds;
• Unemployment Insurance Fund (UIF);
• Securities transfer tax (STT)
• skills development levy (SDL).
9. The Commissioner for the South African Revenue Service (CSARS).
10. South African residents are taxed in South Africa on their worldwide income, while non-residents
are only taxed on income that has its source (or deemed source) in South Africa.
11. At 14%.
12. (a) Direct taxes are taxes that are imposed on persons; e.g. income tax, which is based on a
person’s income.
(b) Indirect taxes are taxes that are levied on transactions; e.g. VAT.
13. A Binding General Ruling (BGR) is issued by a senior SARS official, in his or her discretion, and
relates to the application or interpretation of a provision of the tax law on matters of a general
interest or importance.
14. A judgment of a higher court is binding on lower courts, e.g. the judgment in a provincial
decision is binding on a tax court.
293
2 4
294 Tax
axattion
n off In
ndivvidu
uals
ls Sim
S mpliffied
d
Cha
Ch ap
pte
er 2:
2 SSolu
utio
onns
s to
t Exa
E am
mp
ples
s
EX
XAM
MP
PLE 2.1
1
So
oluttion
n
P
Partt C
No
orm
mal tax
x onn R997 500
5 0:
R9
97 500
5 0 is lesss th
han
n R1
189
9 88
80, the
t refo d at 18%:
ore taxx is levvied
= R977 50 00 × 18%
%
= R177 55 50
P
Partt D
Noorm
mal tax
x on
n R2 2466 00
00:
R2246
6 00
00 fallss in the
e ca
ateggoryy R189
R 9 88 81 – R296
R 6 54 40,
there e R34
efore R 178 8 + 26
6% on the e exxcesss amo
a ounnt:
= R334 178 + [(R2[ 246 6 00
00 – R11899 88
80) × 26%
2 %]
= R334 178 + R14 591 5
= R448 769
7
P
Partt E
orm
No mal taxx on
n R3 3344 98
87:
R3
334
4 9887 fallss in the
e ca
ateggoryy R296
R 6 54 41 – R410
R 0 46 60,
Th
here
eforre: R661 910
9 +3 31%% on
o thhe exc
e cess mount:
s am
= R6 9 + [(R3
61 910 [ 334 4 98
87 – R2296 40))) × 31%
6 54 %]
= R6 61 910
9 + R11 919 9
= R7 73 829
8
P
Partt F
Noorm
mal tax
x on
n R7 7777 89
90:
R7777
7 89
90 fallss in the
e ca
ateggoryy R708
R 8 311 – R1
R 500
5 000,
there e R209
efore R 9 03 32 + 4
41%
% on n th
he exce
e esss am
mou unt:
= R2209 032 + [(R R77 77 890
8 – R70 08 3100) × 41
1%]]
= R2209 032 + R28 528 8
= R2237 560
EX
XAM
MP
PLE 2.2
2
So
oluttion
n
At thiss sttagee you havve not ye

et le
earn
nt abo
a ut med
m dica
al tax cre
editss, so
s they
t y ha
ave
e be
een
n ignorred in thiss
queestiion forr tea
ach
hing
g pu
urpoose
es.
P
Partt B
Neet norm
n mall taxx on n R197
R 7 00 00:
R11977 00
00 fallss in the
e ca
ateg goryy R189
R 9 88 81 – R296
R 6 54 40,
there e R34
efore R 178 80 + 226%% off thee exxce
ess ammount:
= R344 1778 + [((R197 000 – R189 880) × 26% %]
= R344 1778 + R1R 8851
= R366 0229 (no ormaal ta
ax)
We mus
W m st reeduce the
e no ormal tax
t by the
e an
nnual reba
r ate//s in
n orde
er to
o ca
alcu
ulatte net
n nor
n maal taax.
Be
eforre w
we can
n ap
pplyy th a ual reb
he ann bate/s, we
e need
d to
o caalcu
ulate
e how oldd the ta
axppaye
er is
s.
Ass th
he ta
axp
paye
er’ss birthd
dayy is in Feb
F brua
ary,, we
e ca
an use
u e 20
018:
20018 – 196
1 60 = 58 8 yeears
s old
(c
con
ntin
nued
d)
So
olution
ns ‘T
Testt yo
ourr kn
now
wled
dge
e’ Que
Q estition
ns & Exam
Ex mppless 29
95
If th
he taxpayyer is borrn in
n Ja
anu
uaryy orr Fe
ebruarry you
y can u use 2018, bu ut if the
e ta
axpaaye
er iss bo
orn in anyy
othher moonth
h, he
h or o she
s e wiill have
h e had
h hiss or her lastt biirthd
dayy in
n 20
017 7, th
hereefore use
u e 20 017
7 when n
calculatinng a
age
e.
Th
here
eforre, the
e taxxpa
ayerr is only entit
e tledd to the
e re
ebate o
of R13
R 63350..
Ne
et norm
n mal taxx = R3 029 – R13
36 0 R 3 63 35 = R22 394 4
P
Partt C
Ne
et norm
n mall taxx onn R90
R 000 0:
R9
90 000
0 0 is lesss th
han
n R1189
9 88
80 and
a is the
erefo
ore taxxed
d at 18%, the
erefore
e
= R90
0 000 × 18%
1 %
= R16
6 200 (no ormal tax)
We mus
W educe the
m st re e noormal tax
t by the e annnual reba
r ate//s in n orde
er too caalcu
ulatte th
he net
n norma al ta
ax:
Ass th
he ta
axp
paye o he or she
er is 65 yyearrs old, e is enntitle
ed tto a rebatte of
o RR21 114 4 (p maryy + se
prim econ ndaary reb
bate
e):
Ne n mal taxx = R16
et norm 6 20 R 114
00 – R21 4 (limitted to R16 2002 norrma al ta
ax)**
= Rniil
* A re
ebaate can
nno
ot crreatte a re
efun
nd, and
d thhere
eforre thhe reb bate
e wiill be
b limitted to the
t no orma al ta
ax
P
Partt D
Ne
et norm
n mall taxx onn R55
R 000 0:
R5
55 000
0 0 is lesss th
han
n R1189
9 8880 and
a is the
erefo
ore taxxed
d at 18%, the
erefore
e
= R55
R 000 × 18 8%
= R9
R 9009 (no orm
mal tax)
t )
We mus
W m st re
educe thee no t by the
ormal tax e annnual reba
r ate//s in n orde
er too caalcu
ulatte th
he net
n norma al ta
ax:
Ass th
he ta
axp
paye o he or she
er is 70 yyearrs old, e is en
ntitle
ed tto a rebatte of
o RR21 114 4
Ne n mal taxx = R9 900
et norm 0 – R221 114 (lim
mite
ed to
t R9R 9 900 0 no
ormaal taax)*
= Rniil
* A re
ebaate can
nno
ot crreatte a re
efun
nd, and
d thhere
eforre th
he reb bate
e wiill be
b limitted to the
t no orma
al ta
ax
P
Partt E
Neet norm
n mall taxx on n R298
R 8 90 00:
R22988 90
00 fallss in the
e ca
ateg
goryy R296
R 6 54 41 – R410
R 0 4660,
there e R61
efore R 910 0 + 31% of the
t exc cesss amo
a ountt:
= R61 910 + [(R2 298 900 – R2296 54
40) × 31%%]
= R61 910 + R73 R 32
= R62 2 642 (no ormal tax)
We mus
W m st re
educe thee no t by the
ormal tax e an
nnual reba
r ate//s in
n ordeer to
o ca
alcuulatte th
he net
n norma al ta
ax.
Be we can
eforre w n apply th
he reb
r bate w need to calc
es, we ate ho
c cula ow old
o the e ta
axpa ayeer iss. A
As thhe taxpayyer’’s birth
b hda ay iss
in Deecemb w use
ber we e 200177: 20177 – 193
34 = 83
8 year
y rs oold, theereffore
e he
e is entitleed to
t aall th
hree
e reeba
atess:
Neet norm
n mal taxx = R62 2 64
42 – R23
R 607
= R399 03
35
Parrt F
Ne
et norm
n mall taxx on
n R1
R 5 550 000
00:
Ta
ax on
o RR1 550
5 0 0000 falls
f s in thee caateg
gorry R1
R 500
5 0000 a
and ab
bove
e,
Th
here
eforre R53
R 33 625
6 +4 45%
% of
o thhe exce
e ess s am
mou
unt:
= R53 5 +[(R1 550 000
33 625 0 – R1 50 0 ) × 45%
00 000) %]
= R53 5 + R2
33 625 22 5500
= R5556 125
5 (n mal tax
norm x)
We mus
W m st re
educe the
e am unt by the
mou e prrimaary reb
bate
e off R1
13 635
6 5 ass the
e persson is you
y unge
er than
t n 65
5:
Ne n mal taxx = R55
et norm 56 125
5 – R13
3 63 35
= R54
42 490
4 0
2 6
296 Tax
axattion
n off In
ndivvidu
uals
ls Sim
S mpliffied
d
EX
XAM
MP
PLE 2.4
4
So
oluttion
n
N nor
Net n ma
al ta
ax iss no
orm
mal ttax less th
he ann
a nual rebatte and
a meedic
cal taxx cre
edits (if app
a lica
able
e).
P
Partt B
Neet norm
n mal taxx on n R197 7 00
00:
First you
u mustt caalcu ulate
e no
ormmal tax:
R11977 00
00 fa
allss in the
e ca goryy R189
ateg 9 88
81 – R2966 54
40,
thereefore
e R34
R 178 8 + 26 t exc
6% of the cesss amo
a ountt:
= R34 4 178 + [(R1 197 000 – R1 189 8880) × 26%%]
= R34 4 178 + R1R 851
8 0
= R36 6 029 (noormal tax)
We mus
W educe the
m st firrstlyy re e no ormal tax by thee an
nnual rrebaate//s in
n orrde
er to
o ca
alcuulate net norm
n mal taxx.
Beeforre w
we can n ap pplyy th a ual reb
he ann bate/s, we e needd to
o caalcu
ulatee how old d the ta
axppayeer is
s.
Ass th
he taaxppaye er’ss birthd
day y is in Feb
F brua
ary,, we
e caan use
u e 20 018:
2018 8 – 196 60 = 58 yyearrs oldo
Th
here eforre, the
e taxxpa ayerr is only entit
e tledd to the bate of R13 635
e prrimaryy reb 5.
Ass th
he taaxppayer con
c ntrib
buteed towt ward
ds a mediicall sc chemme and iss yo oun
nger than 65 yeaars of age
e, he
h oor she
s is also
a o
en
ntitle
ed to the
t me edic
cal sch hem me fees
f s taax cred
c dit.
Th
he med
m dica al sche
s eme e fe
ees taxx crredit (M MSF FTCC) iss ca
alcuulatted as follow
ws:
• R3 303 pe er mon
m nth ffor 12 mo onth
hs in re esppect off the axpaye
e ta er + R33033 peer mon
m nth for 12
2 mo
onths in resp
r pecct of
o
hiss orr he
er spou
use e (firrst dep
d penndent); plu us
• R2 204 pe er mon
m th in re esp pect off hiss orr he
er childd (a
additional de epenndeent))
Th
here
eforre the
t tottal me cal sch
edic hem
me ffees ta edit is R9 72
ax cre 20 [(R3
[ 3033 × 2 × 12
1 mmonths) + (R20
04 × 1 × 12
2
montths))]
he net
Th n norrma al ta
ax pay
p yablle by
b the taxxpay yer is:
= R366 029 (noormal tax) – R13
R 3 63 r ate) – R9 720 (M
35 ((primary reba MSFTC
C)
= R122 674
P
Partt C
Neet norm
n mall taxx onn R54
R 000 0:
First you
u mustt caalcu
ulate
e no
ormmal tax:
R554 0
000
0 is lesss th
han
n R11899 88
80, and
a d is the
ereffore
e ta
axed
d att 18
8%, the
ereffore
e
= R544 000 × 18%
1 %
= R9 720 (nnorm mal tax)
We mus
W m st first red ce the norma
duc ax by the
al ta e an
nnu
ual rreb
bate
e/s and
a d th
hen the
e med
m dica
al sc
che
eme
e fe
ees tax
x crredit, if
ap
pplicab calculate the
der to c
ble, in ord e ne
et norm
n mal taxx:
Ass th
he ta
axp
paye
er is 65 yyearrs old,
o he or she
e is en
ntitle
ed tto a rebatte of
o RR21 114
4 (p
prim
maryy and sec
con
ndary reba
r ate).
Thhe taxp
t pay yer con
ntrib
buted tow ds a m
ward med
dica
al sc
che
eme nd so he or she
e an ed tto the me
e is entitle edic
cal ssch
hem
me fees
f s
tax cred
dit.
Th
he med
m dica al sche
s eme e fe
ees taxx crredit iss caalcuulate
ed as followss:
• R3303 pe er mon
m nth ffor 12 mo onth
hs in re esppect off the axpaye
e ta er + R3
303
3 pe m nth for 12
er mon 2 mo
onths in resp
r pecct of
o
hiss orr he
er spou
use
e (firrst dep
d penndent); plu us
• R2204 pe er mon
m th in reesp pect off hiss orr he
er child additional de
d (a epen
nde
ent))
Th
here
eforre the
t tottal me
edic
cal sch
hem
me ffees ta edit is R9 72
ax cre 20 [(R3
[ 3033 × 2 × 12
1 mmonths) + (R20
04 × 1 × 12
2
montths))]
Ne
et norm
n mal taxx 9 72
= R9 20 (no
( rma al ta
ax) – R21
R 1 114 – R9
R 720
7 0 (M
MSF
FTC
C bu
ut limited to Rn
nil as
a a re
eba
ate can
c nno
ot
cre e a reffund
eate d)
= Rn
nil
(c
con
ntin
nued
d)
Solutions ‘Test your knowledge’ Questions & Examples 297
Part D
Net normal tax on R40 000:
First you must calculate normal tax:
R40 000 is less than R189 880 and is therefore taxed at 18%, therefore
= R40 000 × 18%
= R7 200 (normal tax)
We must first reduce the normal tax by the annual rebate(s) and then by the medical scheme fees tax credit, if
applicable, in order to calculate the net normal tax:
As the taxpayer is 70 years old, he or she is entitled to a rebate of R21 114 (primary and secondary rebate)
The taxpayer contributed towards a medical scheme so he or she is entitled to the medical scheme fees tax
credit.
• R303 per month for 12 months in respect of the taxpayer + R303 per month for 12 months in respect of
his or her spouse (first dependent); plus
• R204 per month in respect of his or her child (additional dependent)
Therefore the total medical scheme fees tax credit is R9 720 [(R303 × 2 × 12 months) + (R204 × 1 × 12
months)]
Net normal tax = R7 200 – R21 114 – R9 720, (MSFTC limited to R nil as a rebate cannot be refunded)
= Rnil
Part E
R298 900 falls in the category R296 541 – R410 460,
therefore R61 910 + 31% of the excess amount:
= R61 910 + [(R298 900 – R296 540) × 31%]
= R61 910 + R732
We must first reduce the normal tax by the annual rebate/s, then by the medical scheme fees tax credit, if
applicable, in order to calculate the net normal tax:
As the taxpayer is 81 years old, he or she is entitled to all three rebates:
Net normal tax = R62 642 – R23 607
= R39 035
• R204 per month in respect of his or her child (additional dependant)
Therefore the total medical scheme fees tax credit is R9 720 [(R303 × 2 × 12 months) + (R204 × 1 × 12
months)]
Net normal tax = R62 642 – R23 607 – R9 720
= R29 315
Part F
Tax on R450 000 falls in the category R410 461 – R555 600,
Therefore R97 225 + 36% of the excess amount:
= R97 225 +[(R450 000 – R410 460) × 36%]
= R97 225 + R14 234
We must reduce the amount by the primary rebate of R13 635 as the person is younger than 65.
We must first reduce the normal tax by the annual rebate/s and then the medical scheme fees tax credit, if
applicable, in order to calculate the net normal tax.
As the taxpayer is younger than 65 years old, he or she is entitled to a rebate of R13 635 (primary rebate).
(continued)
The taxpayer contributed towards a medical scheme and so he or she is entitled to the medical scheme fees
tax credit.
his or her spouse (first dependent); plus
• R204 per month in respect of his or her child (additional dependent)
Therefore the total medical scheme fees tax credit is R9 720 [(303 × 2 × 12 months) + (R204 × 1 × 12
months)]
Net normal tax = R111 459 – R13 635 – R9 720
= R88 104
EXAMPLE 2.8
Solution
Part C
First, we need to calculate the normal tax:
As the taxable income is R135 987 it falls in the category R0 – R189 880, therefore
= R135 987 × 18%
= R24 478
To calculate the net normal tax, we need to reduce the normal tax by the annual rebate and the medical
scheme fees tax credit:
= R24 478 (normal tax) – R13 635 (primary rebate) – R3 636 (R303 × 12 × 1) (MSFTC)
= R7 207
In order to calculate the final tax liability, we need to take into account the pre-paid taxes:
= R7 207 (net normal tax) – R20 060 (pre-paid taxes)
= (R12 853) refundable by SARS to taxpayer
Part D
First, we need to calculate the normal tax:
R265 000 falls in the category R189 881 – R296 540, therefore
= R34 178 + [(R265 000 – R189 880) × 26%]
= R53 709
To calculate the net normal tax, we need to reduce the normal tax by the annual rebate and medical scheme
fees tax credit:
= R53 709 – R13 635 (primary rebate) – R3 636 (MSFTC)
= R36 438
= R36 438 (net normal tax) – R43 060 (employees’ tax)
= (R6 622) refundable by SARS to taxpayer
Part E
First we need to calculate the normal tax:
R786 900 falls in the category R708 311 to R1 500 000, therefore
= R209 032 + [(R786 900 – R708 310) × 41%]
= R241 254
In order to calculate the net normal tax, we need to reduce the normal tax by the annual rebate and the
medical scheme fees tax credit:
= R241 254 (normal tax) – R13 635 (primary rebate) – R3 636 (MSFTC)
= R223 983
= R223 983 (net normal tax) – R36 285 (employees’ tax)
= R187 698 payable to SARS by the taxpayer

1. A payslip.
2. Pension fund contributions, UIF and employees’ tax.
3. 28/29 February each year.
4. An IRP5/IT3(a); a summary of all 12 payslips and the taxation paid (employees’ tax).
5. Employees’ tax is the tax deducted by the employer before paying the employee his or her
salary. It is income tax that is prepaid. Another name for it is PAYE.
6. Individuals earning more than the income tax threshold.
7. SARS requires all those receiving any form of employment income – including those below the
tax threshold – to be registered with SARS to help reduce the scope for non-compliance.
The following taxpayers must submit a tax return:
• residents that carried on any trade (that is other than solely as an employee);
• that are paid or granted a business travel, accommodation or subsistence allowances; or
• that are granted certain taxable benefits or advantages derived by reason of their employment
and whose gross income exceeded R75 000 (if under 65), R116 150 (if older than 65 but
under 75) or R129 850 (if older than 75 years);
• that are residents and had capital gains or losses exceeding R40 000;
• that are not residents and derived any capital gain or loss from the disposal of any asset to
which the Eighth Schedule of the Income Tax Act applies;
• that are residents and held foreign currency or owned assets outside of South Africa which
had a value of more than R225 000 at any stage during the year;
• that are residents to whom any income or capital gains could be attributable due to fluctu-
ations in the value of the South African currency relative to any foreign currency;
• that are residents that held any participation rights in a controlled foreign company;
• that have, in receipt of gross income, received an amount that exceeded R75 000 (if under
65), R116 150 (if older than 65 but under 75) or R129 850 (if older than 75 years); or
• that are issued with a tax return or requested by SARS to file a return (irrespective of their
income).
8. It is the SARS calculation of all income and all deductions declared. Net normal tax is then
calculated less all pre-paid taxes.
9. Net normal tax on R498 650:
R498 650 – R410 4600 = (R88 1900 × 36%) + R97 225
= R128 973 less R13 635 (primary rebate)
= R115 338 less MSFTC less METC
= R115 338 less R3 636 less R389
= R111 313
Medical scheme fees tax credit (MSFTC)
The medical scheme fees tax credit is calculated as follows for the taxpayer:
• R303 per month for 12 months in respect of the taxpayer therefore,
• the MSFTC is R3 6 36 (R303 × 1 × 12 months).
As the taxpayer also incurred qualifying additional medical expenses, the taxpayer is also
entitled to an additional medical expense tax credit.

The taxpayer is younger than 65 years of age; therefore, the additional medical expense tax
credit is calculated as follows:
METC = 25% x [Step 1 + Step 2 – Step 3]
Step 1: Medical scheme fees paid – (4 x medical scheme fees tax credit)
METC = 25% × [(R45 000 – (4 × R3 636)) + R8 500 – (R498 650 × 7,5%)]
= 25% × [(R45 000 – R14 5448) + R8 500 – R37 399)]
= 25% × [R30 4562 +R8 500 – R37 399]
= R389
Note: The sum of the excess medical scheme contributions and the qualifying expenses can
only be used in the calculation of the credit if they exceed 7,5% of taxable income.
The final net normal tax payable by the taxpayer is:
= R128 973 (normal tax) – R13 635 (primary rebate) – R3 636 (MSFTC) – R389 (METC)
= R111 313
10. Net normal tax on R489 970:
R489 970 – R410 460 = (R79 5100 × 36%) + R97 225
= R125 849 less primary and secondary rebate (R21 114)
= R104 735 less MSFTC less METC
= R104 735 less R3 636 less R27 004
= R74 095
Medical scheme fees tax credit (MSFTC)
The medical scheme fees tax credit is calculated as follows for the taxpayer:
R303 per month for 12 months
MSFTC = R3 636 [(R303 × 1 × 12 months)
As the taxpayer also incurred qualifying additional medical expenses, the taxpayer is also
entitled to an additional medical expense tax credit.
The taxpayer is older than 65 years of age; thus the additional medical expense tax credit is
calculated as follows:
METC = [Step 1 + Step 2]
Step 1: 33.3% × [Medical scheme fees paid – (3 × medical scheme fees tax credit)]
Step 2: 33.3% × Qualifying medical expenses
METC = [33.3% × [(R75 000 – (3 × R3 636))] +(33.3% × R17 000)
= [33.3% × [(R75 000 – R10 908)] + R5 661
= [33.3% × R64 092] + R5 661
= R27 004
11. Final tax liability represents the amount that a taxpayer must pay SARS or receive as a refund
from SARS, on assessment. It is calculated using net normal tax less all pre-paid taxes.
12. The taxpayer should start the objection process by asking the Commissioner in writing for
reasons for the assessment (if filing manually) or click on the ‘Request for reasons’ button on
eFiling and if the taxpayer is not satisfied with the reasons, then the taxpayer should object to
these reasons.
13. Yes, the taxpayer must submit these reasons within 30 days from the date of the assessment and
the taxpayer must object within 30 days from the date that the reasons were received (or if no
reasons were requested, within 30 days from the date of the assessment).
Question 1
Solution
R R
Salary 300 000
Bonus 24 000
Foreign dividends 1 420
Local interest (not from a TFIA) 26 000
GROSS INCOME 364 270
Less: EXEMPT INCOME
SA dividends (4 000)
Investment exemption
Foreign dividends – section 10B(3) (R1 420 × 25/45) (789)
Foreign interest – none –
Local interest (maximum exemption is applied as not from a TFIA) (23 800) (28 589)
INCOME 335 681
Less: ALLOWABLE DEDUCTIONS
Total retirement fund contributions
= R25 500 + R2 000 + R3 600 = R31 100
• R350 000; or
i Remuneration = R324 000 (R300 000 salary + R24 000 bonus)
i Thus: 27,5% × R335 681 = R92 312 or
• R335 681
The limit is the lesser of R350 000,R92 312 and R335 681, thus
R92 312. As the contributions are less than the limit, they are deductible in full. (31 100)
304 581
Donation to the University of Bambridge – R7 500 (allowable)
Limited to 10% of R304 581 = R30 458 – deduct in full (7 500)
Tax per the 2018 tax table

((R297 081 – R296 540) × 31% + R61 910) 62 078
Less: Medical scheme fees tax credit (Note 1) (12 168)
Less: Additional medical expenses tax credit (Note 2) –
Net normal tax payable to SARS 36 275

(R303 + R303 + R204 + R204) × 12 = R12 168
Note 2: Additional medical expenses tax credit
Tweedy falls in the third category.
METC = 25% × (Step 1 + Step 2 – Step 3)
Step 1: R30 000 – (4 × R12 168) = R0 (negative answer is limited to Rnil)
Step 2: R3 350
Step 3: R297 081 (taxable income) × 7,5% = R22 281
METC = 25% × (R0 + R3 350 – R22 281) = Rnil
Question 2
Solution
R R
Salary 300 000
Bonus 24 000
Foreign dividends 710
Local interest – not from a TFIA 12 500
Less: EXEMPT INCOME
SA dividends (2 000)
Foreign dividends (given in question that dividends are fully exempt) (710)
Local interest (up to R34 500 but limited to actual amount received) (12 500) (15 210)
INCOME 328 425
= R25 500 + R2 000 + R3 600 = R31 100
• R350 000; or
i Thus: 27,5% × R328 425 = R90 317; or
• R328 425
The limit is the lesser of R350 000; R90 317 and R328 425, thus
R90 317. As the contributions are less than the limit, they can be deducted in full. (31 100)
297 325
Donation to the University of Bambridge – R35 000 (allowable)

Limited to 10% of R297 325 = R29 733.
The excess of R5 267 (R35 000 – R29 733) is carried forward to the 2019 year of
assessment. (29 733)
Tax per the 2018 tax table:

[(R267 592 – R189 880) × 26% + R34 178]
54 383
Less: Secondary rebate (7 479)
Less: Additional medical expenses tax credit (Note 2) (3 841)
Net normal tax 22 156

(R303 + R303) × 12 = R7 272
Gweedy falls into the first category.
Step 1: 33,3% × [R30 000 – (3 × R7 272)] = R2 725
Step 2: 33,3% × R3 350 = R1 116
METC = R2 725 + R1 116 = R3 841
Question 3
Solution
R
Salary 120 000
Commission 95 000
Local interest (not from a qualifying TFIA) 6 000
Less: EXEMPT INCOME
Local interest (up to R23 800 but not more than the amount received) it is not a qualifying TFIA
(6 000)
INCOME 215 000
= R28 400 + R32 000 = R60 400
• R350 000; or
i Thus: 27,5% × R215 000 = R59 125
• R215 000
The limit is the lesser of R350 000; R59 125 or R215 000, thus R59 125.
The contributions are thus limited, the excess of R1 275(R60 400 –
R59 125) is carried over to the next year of assessment. (59 125)
155 875
Donation to Hospice – R1 400 (allowable) 1 400

Donation to SPCA – excess R800 carried over from 2017 (allowable) 800
2 200
Limited to 10% of R155 875 = R15 588. The total R2 200 donation is thus deductible.
No excess to carry forward to the 2019 year of assessment (2 200)
Tax per the 2018 tax table (R153 675 × 18%) 27 662
Less: Medical scheme fees tax credit (Note 1) –
Less: Additional medical expenses tax credit (Note 2) (3 369)

Andy is not a member of a registered medical scheme and therefore does not qualify for the
medical scheme fees tax credit.
Andy falls in the third category.
Step 1: Rnil – (4 × Rnil) = R0 (no medical scheme, thus no Step 1)
Step 2: R25 000
Step 3: R153 675 (taxable income) * 7,5% = R11 526
METC = 25% × (R0 + R25 000 – R11 526) = R3 369

1. All receipts and accruals, thus world-wide income.
2. Only income that has its source in the Republic.
3. The four requirements of the general definition of ‘gross income’ for a resident are:
• in any year or period of assessment;
• the total amount in cash or otherwise;
• received by or accrued to or in favour of; and
• excluding receipts or accruals of a capital nature.
4. (i) The person must have been in South Africa for more than 91 days in the current year of
assessment; and
(ii) The person must have been in South Africa for more than 91 days in each of the previous
five years of assessment; and
(iii) The person must have been in South Africa for more than 915 days in total for the previous
five years.
5. It accrues when he or she becomes unconditionally entitled to an amount.
6. (i) Subjective tests
• Intention;
• change of intention; and
• mixed intention.
(ii) Objective tests
• manner of acquisition;
• manner of disposal;
• period asset was held;
• continuity;
• occupation of the taxpayer; and
• nature of the asset.
7. Annuities, alimony, services rendered, restraint of trade, lump-sum benefits, lease premiums,
know-how payments, fringe benefits, dividends, and recoupments and other inclusions.
8. The R10 000 received for the report is for services rendered. Under paragraph (c) of the
definition of gross income (the special inclusions) it will be included in Madge’s gross income.
There must be a causal relationship (a link) between the services rendered and the money
received. ‘Services rendered’ does not only mean between an employer and employee – it has a
wider meaning.
9. False, each taxpayer is entitled to the full interest exemption.
10. Taxpayer younger than 65: R23 800 Taxpayer 65 and older: R34 500
11. False, only certain foreign dividends may be exempt from income tax in terms of section 10B.
12. True
13. True
14. An amount of R35 000 (and not the present value of R20 000) will be included in Kenny’s gross
income for the 2018 year of assessment. The reason is that there is a proviso to the definition of
gross income which provides that the face value shall be deemed to accrue to a person during
the applicable year of assessment. The accrual will take place on 15 February 2018 as delivery
took place on this date, thus there are no further conditions to be met and Kenny has uncondi-
tionally become entitled to the amount.
15. Income of Mrs Sage:
Gross income (R80 000/2 + R40 000/2) = R60 000 (married in community of property)
minus exempt income (R20 000 interest exemption – R23 800 limited to actual interest received
of R20 000)
R40 000 income for the current year of assessment
16. The profit on the sale of the private computer will be of a capital nature. He is a teacher and his
occupation is not related to the sale of the computer. He is entitled to sell his asset to the best
advantage and this does not indicate that the profit is of a revenue nature. My answer would
potentially change if he sold computers after hours to supplement his salary as he would then be
involved in a scheme of profit making and the computers would be treated as trading stock
rather than capital assets. It could appear that he would be doing more than just selling his
private computer in this instance, as the sales of computers would be more frequent, and it
could then appear to be of a revenue nature and thus taxable. However, if he can prove (as
required in terms of section 102 of the Tax Administration Act) that the sale of his private
computer was not related to his after-hours business, then the sale of this computer would be of
a capital nature. However, if he could not prove this, then the sale would be regarded as the sale
of a revenue nature.

1. Investment income, pensions and other annuities received.
2. (a) False – expenses may be deducted if they are incurred in the production of income.
(b) False – so long as an expense is actually incurred it is deductible.
(c) False – there must be a legal obligation before an amount is deductible or it must be
actually incurred.
(d) False – expenses of a capital nature are not deductible in terms of section 11(a).
(e) True.
3. The requirements for the general deduction formula are:
• the taxpayer is carrying on a trade;
• all expenditure and losses;
• actually incurred;
• during the year of assessment;
• in the production of income;
• not of a capital nature; and
• partly or fully expended for purposes of trade.
4. ‘In the production of income’ means that the expense should be incurred with the intention of
earning income as defined in the Income Tax Act, that is gross income less exempt income. This
means that where an expense is incurred to earn exempt income it will not be deductible. It does
not mean that the expense must be necessarily incurred. It also means that the expense should
be closely linked to the income earning operations of the trade.
The employment of the delivery man is part of Cassie’s business operations. It is reasonable to
expect that during such deliveries the possibility exists that the delivery man could be bitten by a
dog. It is an inevitable concomitant of the type of business that such an expense can arise.
Therefore, there is a close link to the operations (income earning activities) and thus the R3 750
will be incurred in the production of income.
5. (a) True – in terms of section 23 no private or domestic expenses may be deducted for tax
purposes.
(b) False – in terms of section 23 expenses incurred to produce exempt income are prohibited.
(c) False – in terms of section 23 provision for expenditure is a prohibited expense.
(d) False – the amount of the loan was not included in the taxpayer’s income (being of a capital
nature) thus it cannot be deducted as bad debts.
6. A taxpayer who only earns a salary will be able to deduct:
• bad and doubtful debts but only relating to the payment of his or her salary;
• home study expenses subject to strict requirements;
• legal expenses relating to claiming salary that is owed to him or her;
• wear and tear on assets that are used in earning his or her salary;
• retirement fund contributions; and
• donations to public benefit organisations.
Question 7
Solution
R
Gross income 22 350
Less: Deductions
Wages (8 125)
Wear and tear (R16 200/6 years × 7/12) (1 575)
Maintenance (1 850)
External drive for storing patterns (750)
Interest (R28 125 × 25 m2/290 m2) (2 425)
Water and electricity (R22 848 × 25 m2/290 m2) (1 970)
Cell phone (R3 900 × 50%) (1 950)
TAXABLE INCOME FROM TRADE 3 705
Question 8
Solution
R R
Salary 490 000
SA interest 24 000
Foreign dividends (taxable portion) 500
Less: EXEMPT INCOME
SA interest (23 800)
INCOME 490 700
Cell phone expenses (not allowable in terms of section 23(m) –
see Note 1) nil
Cost – depreciation (full cost, qualifies as ‘small item’) (3 700)
Legal expenses – these do not relate directly to employment nil
Home office expenses
Rent paid R43 200 × 14 m2/150 m2 4 032
Water and electricity R10 680 × 14 m2/150 m2 997
Stationery – not related to his employment nil
Repairs 630 (5 659)
Taxable income subtotal 481 341
Retirement fund contributions
Total retirement fund contributions = R40 000
• R350 000; or
i Thus: 27,5% × R490 000 = R134 750; or
• R481 341
The limit is the lesser of R350 000; R134 750 and R481 341, thus a
maximum of R134 750.Therefore the contributions are deductible in full as
they are less than the limit. (40 000)
(continued)
R
Normal tax = (R441 341 – R410 460) × 36% + R97 255 108 342
Less: Annual rebate (primary rebate as he is under 65 years old) (13 635)
Less: Additional medical expenses tax credit (Note 3) nil
NET NORMAL TAX 91 071
Notes:
1. Section 23(m) only allows a deduction in respect of wear and tear on an asset that is used regularly for
work purposes. None of the other running expenses are deductible by a person earning only a salary.
2. R303 ×12 = R3 636
3. Freddy falls into the third category
METC = 25% × (Step 1 + Step 2 – Step 3) = 25% × (R240 + R6 950 – R33 101) = Rnil
Step 1: (R1 232 × 12 months =R14 784) – (4 × R3 636 = R14 544) = R240
Step 2: R6 950
Step 3: R441 341 * 7.5% = R33 101
Question 9
Solution
R R
Salary 230 000
Rent received 56000
Less: Deductions
Legal expenses – capital nature, enduring benefit nil
Estate agent’s rental commission – in the production of income (3 600)
Bond repayments – capital repayment, capital, not deductible nil
Bond repayments – R64 000 × 60% is interest, in the production of income (38 400)
Wall – capital of nature, improvement nil
Installation of security system – cost not deductible under s11(a), but can
deduct as wear and tear
R10 000/5 years × 10/12 (1 667)
Property rates and taxes – in the production of income (2 400)
Payments to security company (6 390)
Taxable net rental 3 543
Normal tax = (R233 543 – R189 880) × 26% + R34 178 45 530
Less: Annual rebate (primary rebate as she is under 65 years old) (13 635)
Less: Medical scheme fees tax credit (Note 1) nil
Less: Additional medical expenses tax credit (Note 2) nil
NET NORMAL TAX 31 895
Notes:
1. Jane does not belong to a medical aid fund, thus there are no contributions. Due to this fact there is no
medical scheme fees tax credit.
2. Although Jane is not a member of a medical aid fund, she has paid for qualifying medical expenses. As
such, she is entitled to claim the additional medical expenses tax credit. Jane falls into the third category.
Step 1: R0 – (4 × R0) = R0
Step 2: R5 689
Step 3: R233 543 * 7.5% = R17 516
METC = 25% × (R0 + R5 689 – R17 516) = Rnil
Question 1
Solution
R R
Salary (R17 400 × 12) 208 800
Dividends received:
From SA public company 2000
From SA private company 1 800
3 800
Less: Exemption (section 10(1)(k)) (3 800) nil
Dividends received:
From UK company 2 400
From South American company 1 700 4 100
Interest received 13 100

Less: Exemption (section 10(1)(i) as not a tax free investment account)
(R23 800 available but limited to interest received) (13 100) nil
Sale of stamp collection (capital) nil

Cash prize (capital) nil
Rental received (R1 800 × 12) 21600
Less: Rental expenses: (production of income)
Rates & taxes (8 000)
Repairs (2 000)
Fencing costs (capital) nil
Replacement of geysers (4 500)
Painting costs (2 500) 4 600
Travel allowance:
Calculate the deemed expense (as no records of actual expenses were
maintained)
Fixed cost, based on determined value:
R170 000 + (170 000 × 14%) = R193 800
Fixed cost per km (R73 427/30 000 km x 100) 244,8c
Fuel cost 110,6c
Maintenance cost 45,4c
Total 400,8c
Total km travelled 30 000 km
Less: private km per logbook (18 000 km)
Business km 12 000 km
Business expenditure 12 000 km × R4,00 = R48 000
However, the amount of R48 000 is limited to the allowance of R36 000 (48 0000 nil
Use of company car:
Determined value = R120 000 (the retail market value – given)
Use of car (per month)
R120 000 × 3,25% (as a maintenance plan is included in the cost)
= R3 900
Annual value (R3 900 × 12 months) 46 800
Low-interest debt (R12 000 × (7,75% – 5%) × 5/12) 138
Housing benefit
= (A – B) × C/100 × D/12
= (R200 000 – R75 750) × 18% × 12/12 22 365
(continued)
R R
Holiday accommodation (R275 × 2 people × 5 nights) 2 750
Medical fringe benefit
Employer contribution (R1 550 × 12 months) 18 600
308 153
Less: Pension fund deduction
Contribution (R1 200 × 12), R14 400, limited to the lesser of:
• R350 000; or
i Thus: 27,5% × R344 090 = R94 625; or
• Taxable income before the inclusion of the CGT gain (R344 090)
The limit is the lesser of R350 000;R94 625 and R344 090, thus R94 625 but
limited to actual contributions. (14 400)
293 753
Donations:
University of the Western Cape – R2 000
Limited to 10% × R329 690 = R32 969 (2 000)
Question 2
Solution
R R
Company car
If Blanc takes the company car, his taxable income would increase by:
Retail market value of car R150 000
Fringe benefit 3,5% (as no maintenance plan included)
Period 12 months
Therefore R150 000 × 3,5% × 12 months 63 000
TAXABLE INCOME before deductions 63 000

Less: Across-the-board business use deduction:
(63 000 × 53 000 km/65 000 km) (51 369)
Less: Other costs paid for in FULL by employee
Insurance, maintenance and licence
R0 (all costs borne by employer) × 53 000 km/65 000 km nil
Fuel (101,8c × 12 000 km) but borne by employer (thus R0) nil
TAXABLE INCOME ON ASSESSMENT 11 631

Travel allowance
If Blanc takes the travel allowance, his taxable income would be affected as
follows:
Allowance (R7 400 × 12 months) 88 800
Deduction (see calculation) (88 800) nil
Fringe benefit: Interest-free debt 13 253

(7,75% × R171 000 × 365/365)
The company car option will result in the lesser amount being included in taxable income for the 2018 year of
assessment. However, Blanc not will own the car.
(continued)
R R
Calculation of deduction against travel income
Actual expense
Wear and tear allowance R171 000/7 years 24 429
Expenses (given) 27 350
Deemed interest on loan R171 000 × 7,75% 13 253
65 032
R65 032 100
Cost per kilometre = ×
65 000km 1 100,1c/km
Deemed expense
Value of car is R171 000
Fixed cost per table R73 427
R73 427 100
Cost per kilometre = ×
65 000km 1 113,0c
Fuel 110,6c
Maintenance 45,4c
Cost per kilometre 269,0c
Use the greater of the two amounts(100,1c or 269,0c), which is R2,69

Actual kilometres
Total kilometres 65 000 km
Less: private kilometres 12 000 km
Business kilometres 53 000 km
Business expenditure (53 000 km × R2,69 = R142 570)
Limited to allowance (R7 400 × 12 months) = R88 800
Question 1
Solution
Taxpayer A
R
Proceeds 800 000
Less: Base cost
Valuation date value
Greatest of :
• Market value on 1 October 2001 = R400 000
• (Proceeds – expenditure after 1 October 2001) × 20%
= (R800 000 – R35 000) × 20% = R153 000
• Time-apportionment base cost = R243 951
Therefore the valuation date value will be R400 000. (400 000)
Add: expenditure incurred after 1 October 2001 (35 000)
× 50% married in community of property 182 500

Less: Annual exclusion ( 40 000)
142 500
× 40% is amount to be included in taxable income 57 000
Taxpayer B
The yacht is a personal-use asset; therefore there will be no capital gains tax implications when it is sold.
Taxpayer C
R R
Lounge suite – personal-use asset nil
Motor vehicle – personal-use asset nil
Town house
Proceeds 760 000
Less: Base cost
Cost (300 000)
Improvements (40 000)
Repairs nil
Commission (7 600)
As the proceeds are less than R2 million, the capital gain must be
disregarded. (412 400) nil
Shares
Proceeds 200 000
Less: Base cost (90 000)

Aggregate capital gain 110 000
Total gain 70 000
× 40% = amount to be included in Carlos’ taxable income 28 000
(continued)
Taxpayer D
R
Proceeds 600 000
Less: Base cost (650 000)
Capital loss (50 000)
Less: Annual exclusion 40 000
Loss carried forward to following year of assessment (10 000)
Note: Although the boat is longer than 10 m, the loss-limitation rule does not apply. This is because the boat
was used by Derek for his trade purposes.
Taxpayer E
Where a person sells a small business, any capital gain on the sale up to R1 800 000 will be excluded for
capital gains tax purposes. The R1 800 000 is available during a person’s lifetime until it has been used up.
Question 2
Solution
R R
Holiday Proceeds 5 200 000
home Less: Base cost [R2 900 000 + R1 000 000] (3 900 000)
*Not a primary residence, so no exclusions!
Airplane *Not a personal-use asset, as it weighs more than 450kg!
Proceeds 6 500 000
Less: Base cost 6 300 000
Car Personal-use asset, thus no capital gain or loss nil
Lottery Winnings from legal gambling is excluded or disregarded. nil
Total capital gains 1 500 000
Aggregate capital gain 1 460 000
Less: Assessed capital loss from 2017 (250 000)
Net capital gain 1 210 000
× 40% = the amount to be included in taxable income 484 000
Question 3
Solution
R
1. Donation of car 80 000
Less: Annual exemption – maximum R100 000 (80 000)
Donations tax payable nil
2. Donation to a political party – exempt from donations tax –
3. Donation to husband – exempt from donations tax –
4. Writing-off of loan 30 000
Less: Balance of annual exemption (R100 000 – R80 000) (20 000)
Value of donation 10 000
Donations tax payable R10 000 × 20% = R2 000
(continued)
5. Donation to church – exempt from donations tax –

6. Donation to daughter – money returned, therefore no donation –
7. Gold pen – donation in contemplation of death – exempt from donations tax –
Question 4
Solution
Property: R R
Residence 3 900 000
Shares 1 330 000
Cash (R256 000 + R1 707 + R800 000) 1 057 707
Agricultural property (70% × market value) 1 120 000
Deemed property:
Insurance policy 280 000
7 687 707
Less: Liabilities
Clothing account (14 000)
Bond (100 000)
Master’s and executor’s fees (250 000) (387 000)
Value of estate 7 300 707
Dutiable amount 3 800 707
ESTATE DUTY PAYABLE × 20% 760 141
Question 5
Solution
Part (a): Donations tax
R
1. Donation of shares 940 000
Less: Annual exemption – maximum R100 000 (100 000)
Value of donation 840 000
Donations tax payable R840 000 × 20% = R168 000
2. Donation to Cartoonz Trust – exempt from donations tax (public benefit organisation)
(continued)
Part (b): Capital gains tax

R R
Residential Proceeds 2 100 000
property Less: Base cost (1 600 000)
*It is a primary residence, but only 2 out of 3 hectares
qualify for the exclusion.
*Capital gain that does not qualify (R500 000 × 1/3) 166 667
*Capital gain that does qualify (R500 000 × 2/3) 333 333
Less: primary residence exclusion of R2m, limited to (333 333)
Kruger Proceeds 1 850 000
Rands Less: Base cost (300 000)
*Not a personal-use asset, specifically excluded.
Aircraft *Not a personal-use asset, as it weighs more than 450kg!
Proceeds 320 000
Less: Base cost (see note below) (210 000)
Total capital gains 1 826 667

Net capital gain 1 786 667
× 40% = the taxable capital gain 714 667
Note: Calculation of aircraft's base cost (pre-valuation date asset)

• Do the proceeds exceed all expenditure? Yes
Paragraph 26 is applicable (a capital gain situation)
The valuation date value is the greatest of
• Market value = R210 000;
• Time-apportionment base cost = R190 476; or
• 20% × proceeds less expenditure after 1 October 2001 = 20% × (R320 000 – R0) = R64 000.
The market value is the greatest and the proceeds exceed the market value. Therefore, the valuation date
value remains the market value of R210 000. The base cost on 31 October 2016 = R210 000.
Part (c): Estate duty
Property: R R
Holiday flat in Cape Town 1 600 000
Furniture 140 000
Cash 4 400 000
6 140 000
Less: Liabilities
Income tax (35 000)
Master’s fees and administration costs (22 000) (72 000)
Value of estate 6 068 000
Dutiable amount 2 568 000
ESTATE DUTY PAYABLE × 20% 513 600
Solutions to
‘Test your knowledge’ Questions & Examples
1. A payslip.
2. Pension fund, provident fund and retirement annuity fund contributions, and donations to public
benefit organisations (if a section 18A certificate is provided to the employer).
3. An IRP5/IT3(a); a summary of all 12 payslips and the employees’ tax paid.
4. Provisional tax is the pre-payment of the final tax liability of a taxpayer on taxable income other
than employment income.
5.
R
Salary 120 000
Overtime 8 000
Bonus 10 000
Interest (SA Banks) – not from a tax free investment account 21 000
Dividends from foreign companies 3 500
Less: EXEMPT INCOME
Dividends from foreign companies (3 500)
Interest – SA (R23 800 available, but limited to actual interest received) (21 000)
INCOME 138 000
Less: Retirement fund contributions
Contributions of R9 000, limited to the lesser of:
• R350 000; or
i Remuneration = R138 000 (R120 000 + R8 000 + R10 000)
i Thus: 27,5% × R138 000 = R37 950
• R138 000 (taxable income before inclusion of capital gain)
The limit is the lesser of R350 000, R37 950 and R138 000, thus R37 950.
The total retirement contribution of R9 000 is therefore deductible in full. (9 000)
Normal tax payable (according to 2018 tax table) 23 220
Less: Employees’ tax paid (9 800)
FINAL TAX LIABILITY (refundable by SARS) (215)
6. (a) Employees’ tax on R60 000 (R5 000 x 12 months).

(b) Employees’ tax on R124 000.
(c) Employees’ tax on R2 400 per month. 80% of travel allowances are included in the remuner-
ation. The employer may reduce this inclusion to 20% of the allowance if satisfied that the
motor vehicle is being used 80% for business purposes.
(d) No employees’ tax. The auditor carries on an independent trade and is not an employee.
The amount is therefore not ‘remuneration’.
7. Third provisional tax payment (due: 30 September 2018)

Tax on taxable income of R700 000 as calculated by Mrs Frankly R205 791
(R700 000 – R555 600) × 39% + R149 475
Less: Secondary rebate (7 479)
Less: Medical scheme fees tax credit (R303 x 12) (3 636)
Less: Additional medical expenses tax credit (Note) (17 347)
Tax payable in respect of the full year 163 704
Less: First provisional tax payment (47 800)
Less: Second provisional tax payment (105 900)
Third provisional tax payment 10 004
Note:
Additional medical expenses tax credit:
Mrs Frankly is older than 65, thus the first category applies.
METC = 33,3% × (Step 1 + Step 2)
Step 1: R48 000 – (3 × R3 636) = R37 092
Step 2: R15 000
METC = 33,3% × (R37 092 + R15 000) = R17 347

1. Registration of a vendor
From 1 April 2014 there are effectively two types of VAT registration:
• Compulsory registration: Businesses that meet or will exceed the R1 million taxable supply
levels in a 12-month period (i.e. businesses that have a written contractual commitment to
make taxable supplies exceeding R1 000 000 in the next 12-month period);
• Voluntary registration:: The following persons will be allowed to register voluntarily for VAT:
i a municipality; or
i a designated enterprise (e.g. a parastatal or a welfare organisation); or
i a business with a total value of taxable supplies that has exceeded R50 000 (but did not
exceed R1 000 000) in the preceding 12 months; or
i a business with a total value of taxable supplies that has not exceeded but could reason-
ably be expected to exceed R50 000 within 12 months from the date of registration (cer-
tain additional requirements as set out in Regulation No. 446 are necessary before this
type of registration is possible – see chapter 9.2.1 for more details).
• The limit of R1 000 000 is exclusive of VAT, exempt supplies and abnormal receipts.
• The onus is on the vendor to register where necessary, and this must be done within 21 days
of becoming liable to register.
Input and output tax
• Input tax is the total of the VAT paid on taxable supplies of goods and services made to a
vendor.
• Output tax is the tax that is levied by a vendor and must be paid over on any taxable supplies
of goods or services made by a vendor.
Invoice and payments basis
• VAT can be accounted for on one of two bases, namely, the invoice basis or the payments
basis.
• A vendor is compelled by law to register according to the invoice basis if his or her taxable
supplies exceed R2,5 million in any period of 12 months. See section 5(1).
• If a vendor’s taxable supplies are under R2,5 million, he or she may, on application to the
Commissioner, account for VAT on the payments basis. This does not apply to a vendor that
is a juristic person (for example, a company or close corporation).
• A person carrying on a business where the value of taxable supplies made or to be made has
not exceeded R50 000 but can be reasonably be expected to exceed that amount within 12
months from the date of registration. However, this person must use the invoice basis from
the tax period where the taxable supplies exceed R50 000. Foreign suppliers of electronic
services may also register on the payment basis.
• The invoice basis entails that VAT may be accounted for as soon as an invoice is issued/
received or payment is made/received, whichever comes first.
• The payments basis entails that VAT may only be accounted for when payment is made or
received.
2. Standard supply
Standard supply is any supply that attracts VAT at the official rate (14%) according to the Value-
Added Tax Act. Examples: Sale of goods in RSA, rent and services rendered.
Exempt supply
Exempt supply is any supply that is exempted from VAT in terms of section 12 of the Value-
Added Tax Act. If a vendor only makes exempt supplies, then no input tax can be claimed.
Examples: Certain financial services, accommodation in a dwelling and transport of passengers
by rail or road.
Zero-rated supply
Zero-rated supply is any supply that attracts VAT at a rate of 0% in terms of section 11 of the
Value-Added Tax Act. Examples: Export of goods and services, petrol and brown bread.
3. Any employer with a payroll of more than R500 000 is liable to pay a Skills Development Levy.
4. The Skills Development Levy is paid monthly, before the 7th day of the month following the
month for which the contributions accrue. If the employer is registered with SARS, then the SDL
will be paid to SARS along with the PAYE and UIF, using the EMP201 return. Employers who are
not registered as employers with SARS will pay their levy directly to the Department of Labour.
5. Employers are liable to pay Unemployment Insurance Fund contributions. They must pay 1% of
the employee’s remuneration, and the employee must pay 1%. The employer must, however,
deduct the employee’s portion of the contribution before paying the employee.
6. Commission, pension and annuity payments, remuneration of employees who work less than
24 hours each month, and leave gratuities.
7. The maximum amount of UIF that can be deducted from a person amounts to R148,72 per month
or R1 784,64 per year.
8. UIF contributions are payable on a monthly basis, along with SDL and PAYE, using the EMP201
return, where the employer is registered with SARS. Where the employer is not registered with
SARS, payments must be made directly to the Unemployment Insurance Commissioner.
9. The Compensation Fund pays benefits in the form of
• medical expenses;
• wages while the employee is incapacitated;
• part or whole disability payments; and/or
• death benefits.
10. The annual assessment fee is calculated by the Department of Labour on workers’ earnings and
an assessment tariff based on the risks associated with the type of work being done.
11. The STT is a tax levied on every transfer of a security (listed or unlisted).
12. The only method of payment will be through the SARS e-STT system. Revenue stamps or an
impressed stamp may not be used to pay securities transfer tax.
13. Excise duty is levied on locally manufactured, non-essential goods. Customs duty is levied on
imported goods.
14. Ordinary customs duty, specific customs and excise duties, ad valorem customs and excise
duties and anti-dumping duties.
15. 14% × (customs value + customs duty + 10% of customs value)
16. To micro-businesses (trading as sole proprietors, partnerships and incorporated businesses)
with a qualifying turnover of less than R1 million per year. Specifically excluded from this tax
system are personal services (rendered under employment-like conditions) and professional
services.
17. A person must register for the turnover tax by completing and submitting a TT01 form if
registering online or a TT01(a) form if registering manually. This form must be submitted before
the beginning of the year of assessment (a year of assessment runs from 1 March to
28 February), or a later date prescribed by the Commissioner in a Government Notice. Should
you realise during the year that you commence trading that you qualify for the turnover tax, you
should submit an application (TT01 form) within two months from the date that businesses
activities commenced.
Existing micro-businesses can register for/switch to turnover tax before the start of a new tax
year.
You can send the completed form to your nearest SARS branch or by post to:
SARS Revenue Branch Office
PO Box 1003
Alberton
1450
SARS will send a letter to you telling you about the outcome of the application. Where the
submitted TT01 form is incomplete, the taxpayer will be notified and the application will be re-
considered once all the information has been provided.
18. If your turnover exceeds R1 million during any year or if certain qualifying criteria are no longer
met (see paragraph 3 of the Sixth Schedule), you will be forced to deregister. In all other cases,
you can voluntarily deregister by writing to the Commissioner expressing your wish to do so.
You may elect to voluntarily de-register before the beginning of a year of assessment or a later
date announced by the Commissioner in a Government Notice. In the case of a compulsory
deregistration, the business will be deregistered from the beginning of the month following the
month during which the business no longer qualifies for the turnover tax.
If a person has been deregistered (voluntary or compulsory) from turnover tax, he or she may not
be registered as a micro business again.
19. (a) As the taxpayer is trading as a sole proprietor and has a turnover of less than R1 000 000,
the taxpayer would qualify for the turnover tax (assuming all the other qualifying criteria as
set out in the Sixth Schedule of the Income Tax Act are met).
(b) Despite the fact that the taxpayer is conducting his or her trade trading in the form of a close
corporation, the turnover tax regime will be available to the close corporation as the turnover
is less than R1 000 000 (also assuming all other qualifying criteria are met).
20. South Africa is introducing a health promotion levy (sugar tax) to try and help reduce excessive
sugar consumption, which is linked to high instances of heart disease, obesity, cancer and
diabetes. These diseases put strain on the South African health care system both from a
financial as well as a human resources perspective.
21. A non-executive director (NED) is regarded as carrying on an ‘enterprise’ and is, from 1 June
2017, required to register and levy VAT in respect of any director’s fees if the activities are
carried on in the Republic and if the value of such fees exceed R1 million. With regard to
voluntary registration, a NED may choose to voluntarily register for VAT where the value of the
fees exceeds the R50 000.
Question 22
Solution
OUTPUT TAX R
Capital deposited by owner (money (legal tender) is excluded from definition of goods) nil
Sales R79 800 × 14/114 9 800
Interest received (financial service, thus exempt supply) nil
9 800
INPUT TAX
Purchase of materials R34 200 x 14/114 4 200
Salaries – employees (excluded from the definition of ‘enterprise’) nil
– owner (not a supply of goods or services) nil
Manufacturing equipment R6 840 × 14/114 840
Advertisements R1 710 × 14/114 210
Rent of premises (total amount paid) R9 600 × 14/114 1 179
Entertainment costs (input denied) nil
Fuel (zero-rated supply) nil
Delivery vehicle (not yet paid) nil
6 429
Output tax, as calculated 9 800

Less: Input tax, as calculated 6 429
VAT PAYABLE TO SARS 3 371

Question 23
Solution
OUTPUT TAX R
Sales – RSA (R810 000 × 14/114) 99 474
– Zimbabwe (zero-rated) nil
– Lesotho (zero-rated) nil
Debtors – RSA (VAT already raised on the sale to these debtors) nil
– Zimbabwe (VAT already raised (albeit at zero percent) on the sales to these nil
debtors)
Credit sales (R120 000 + R100 000 - R150 000 = R70 000) × 14/114 8 597
108 071
Less: INPUT TAX
Purchases R650 000 × 14/114 (79825)
Payment to creditors (VAT already claimed when goods were purchased on credit) nil
Credit purchases (R350 000 + R200 000 - R300 000)= R250 000 × 14/114 (30702)
Bank charges (R1200 × 14/114) (147)
Stationery (R15 000 – R1 500) × 14/114 (no VAT claimable on the R1 500; although it was
purchased from a non-vendor, it is not second-hand goods) (1 658)
Office furniture R40 000 × 14/114 (Note) (4 912)
Entertainment (input denied) nil
Fuel (zero-rated) nil
Interest (financial service – exempt supply) nil
VAT refundable BY SARS TO TAXPAYER 9 173
Calculations: R
Credit sales:
Debtors’ balance at end of period 120 000
Add: Amounts received from debtors 100 000
220 000
Less: Debtors’ balance at beginning of period 150 000
Credit sales during period 70 000
Credit purchases:
Creditors’ balance at end of period 350 000
Add: Amounts paid during period 200 000
550 000
Less: Creditors’ balance at beginning of period 300 000
Credit purchases for the period 250 000
Note:
The office furniture of R5 000 that was purchased from a non-vendor can have a deemed input tax claimed
on it; therefore the full R40 000 is included for input tax purposes.
Schedules
Schedule A
2018 Tax rates
(i) Persons (other than companies and trusts)
Taxable Income Tax rate
R0–R 189 880 18%
R708 311–R1 500 000 R209 032 + (41% of amount above R708 310)
R1 500 001 and above R533 625 + (45% of amount above R1 500 000)
(ii) Trusts (other than special trusts)

Tax is levied at a flat rate of 41%.
2018 Rebates
Primary rebate – for persons under 65 R13 635
Secondary rebate – for persons 65 to 74 R21 114 (R13 635 + R7 479)
Tertiary rebate – for persons 75 or older R23 607 (R13 635 + R7 479 + R2 493)
2018 Interest exemption

For persons under 65 R23 800
For persons 65 or older R34 500
2018 Monthly medical tax credit

For persons under 65 R303
For persons under 65 with one dependant R606
For persons under 65 with two dependants R810
The third and each subsequent dependant has an additional rebate or credit of R204 per month per
dependant.
323
Schedule B
Employee-owned vehicles (section 8(1))
Scale of values
Fixed Fuel Maintenance
Where the value of the vehicle
cost cost cost
R c c
does not exceed R85 000 ....................................... 28 492 91,2 32,9
exceeds R85 000 but does not exceed
R170 000 ................................................................. 50 924 101,8 41,2
R255 000 ................................................................. 73 427 110,6 45,4
R340 000 ................................................................. 93 267 118,9 49,6
R425 000 ................................................................. 113 179 127,2 58,2
R510 000 ................................................................. 134 035 146,0 68,4
R595 000 ................................................................. 154 879 150,9 84,9
exceeds R595 0000 ................................................ 154 879 150,9 84,9
Schedules 325
Schedule C
Write-off periods acceptable to SARS
Binding General ruling (Income Tax): No. 7

Period of write-off
Item
(Number of years)
Adding machines 6
Air conditioners
Window type 6
Mobile 5
Room unit 10
Air conditioning assets (excluding pipes, ducting and vents):
Air handling units 20
Cooling towers 15
Condensing sets 15
Chillers:
Absorption type 25
Centrifulgal 20
Aircraft: Light passenger/commercial/helicopters 4
Arc welding equipment 6
Artefacts 25
Balers 6
Battery chargers 5
Bicycles 4
Boilers 4
Bulldozers 3
Bumping flaking 4
Carports 5
Cash registers 5
Cell phone antennae 6
Cell phone masts 10
Cellular telephones 2
Cheque-writing machines 6
Cinema equipment 5
Cold-drink dispensers 6
Communication systems 5
Compressors 4
Computers
Mainframes/servers 5
Personal 3
Computer software (mainframes)
Purchased 3
Self-developed 1
Computer software (personal computers) 2
Concrete mixers (portable) 4
Concrete transit mixers 3
(continued)
Period of write-off
Item
(Number of years)
Containers (large metal type used for transporting freight) 10
Crop sprayers 6
Curtains 5
Debarking equipment 4
Delivery vehicles 4
Demountable partitions 6
Dental and doctors’ equipment 5
Dictaphones 3
Drilling equipment (water) 5
Drills 6
Electric saws 6
Electrostatic copiers 6
Engraving equipment 5
Escalators 20
Excavators 4
Fax machines 3
Fertiliser spreaders 6
Firearms 6
Fire extinguishers (loose units) 5
Fire detection systems 3
Fishing vessels 12
Fitted carpets 6
Food bins 4
Food-conveying systems 4
Fork-lift trucks 4
Front-end loaders 4
Furniture and fittings 6
Gantry cranes 6
Garden irrigation equipment (movable) 5
Gas cutting equipment 6
Gas heaters and cookers 6
Gearboxes 4
Gear shapers 6
Generators (portable) 5
Generators (standby) 15
Graders 4
Grinding machines 6
Guillotines 6
Gymnasium equipment
Cardiovascular equipment 2
Health testing equipment 5
Weights and strength equipment 4
Spinning equipment 1
Other 10
Hairdressers’ equipment 5
(continued)
Schedules 327
Period of write-off
Item
(Number of years)
Harvesters 6
Heat dryers 6
Heating equipment 6
Hot water systems 5
Incubators 6
Ironing and pressing equipment 6
Kitchen equipment 6
Knitting machines 6
Laboratory research equipment 5
Lathes 6
Laundromat equipment 5
Law reports: Sets (legal practitioners) 5
Lift installations (goods/passengers) 12
Medical theatre equipment 6
Milling machines 6
Mobile caravans 5
Mobile cranes 4
Mobile refrigeration units 4
Motors 4
Motorcycles 4
Motorised chain saws 4
Motorised concrete mixers 3
Motor mowers 5
Musical instruments 5
Navigation systems 10
Neon signs and advertising boards 10
Office equipment – electronic 3
Office equipment – mechanical 5
Oxygen concentrators 3
Ovens and heating devices 6
Ovens for heating food 6
Packaging and related equipment 4
Paintings (valuable) 25
Pallets 4
Passenger cars 5
Patterns, tooling and dies 3
Pellet mills 4
Perforating equipment 6
Photocopying equipment 5
Photographic equipment 6
Planers 6
Pleasure craft etc. 12
Ploughs 6
Portable safes 25
Power tools (hand-operated) 5
(continued)
Period of write-off
Item
(Number of years)
Power supply 5
Public address systems 5
Pumps 4
Race horses 4
Radar systems 5
Radio communication equipment 5
Refrigerated milk tankers 4
Refrigeration equipment 6
Refrigerators 6
Runway lights 5
Sanders 6
Scales 5
Security systems (removable) 5
Seed separators 6
Sewing machines 6
Shakers 4
Shop fittings 6
Solar energy units 5
Special patterns and tooling 2
Spin dryers 6
Spot welding equipment 6
Staff training equipment 5
Surge bins 4
Surveyors
Instruments 10
Field equipment 5
Tape-recorders 5
Telephone equipment 5
Television and advertising films 4
Television sets, video machines and decoders 6
Textbooks 3
Tractors 4
Trailers 5
Traxcavators 4
Trolleys 3
Trucks (heavy duty) 3
Trucks (other) 4
Truck-mounted cranes 4
Typewriters 6
Vending machines (including video game machines) 6
Video cassettes 2
Warehouse racking 10
Washing machines 5
Water distillation and purification plant 12
Water tankers 4
(continued)
Schedules 329
Period of write-off
Item
(Number of years)
Water tanks 6
Weighbridges (movable parts) 10
Wire line rods 1
Workshop equipment 5
X-ray equipment 5
Schedule D
Table of interest rates contained in the Income Tax Act 58 of 1962
Interest rates charged on outstanding taxes, duties and levies and interest rates payable in respect
of refunds of tax on successful appeals and certain delayed refunds (paragraph (b) of the definition
of ‘prescribed rate’ in section 1 of the Act) (Table 1)
Date from Date to Rate

01.07.2010 28.02.2011 9,50%
01.03.2011 30.04.2014 8,50%
01.05.2014 31.10.2014 9%
01.11.2014 31.10.2015 9,25%
01.11.2015 29.02.2016 9,5%
01.03.2016 30.04.2016 9,75%
01.05.2016 30.06.2016 10,25%
01.07.2016 Until change in PFMA*rate 10,50%
Interest rates payable to taxpayers on credit amounts (overpayment of provisional tax) under sec-
tion 89quat(4) of the Act (paragraph (a) of the definition of ‘prescribed rate’) (Table 2)

01.08.2009 31.08.2009 7,50%
01.09.2009 30.06.2010 6,50%
01.07.2010 28.02.2011 5,50%
01.03.2011 30.04.2014 4,50%
01.05.2014 31.10.2014 5%
01.11.2014 31.10.2015 5,25%
01.11.2015 29.02.2015 5,5%
01.03.2016 30.04.2016 5,75%
01.05.2016 30.06.2016 6,25%
01.07.2016 Until change in PFMA* rate 6,5%
*Public Finance Management Act, No 1 of 1999
Fringe benefit low-interest loans (paragraph (a) of the definition of ‘official rate of interest’ in para-
graph 1 of the Seventh Schedule to the Act) (Table 3)

01.02.2014 31.07.2014 6,5%
01.08.2014 31.07.2015 6,75%
01.08.2015 30.11.2015 7%
01.12.2015 30.01.2016 7,25%
01.02.2016 31.03.2016 7,75%
01.04.2016 31.07.2017 8%
01.08.2017 Until change in Repo rate 7,75%
Schedules 331
Schedule E
Table of subsistence allowances as per Government Gazette No. 40 660
Country Currency Maximum deemed amount
Albania Euro 97
Algeria Euro 110
Angola US $ 303
Antigua and Barbuda US $ 220
Argentina US $ 133
Armenia US $ 220
Austria Euro 131
Australia A$ 230
Azarbaijani US $ 145
Bahamas US $ 191
Bahrain B Dinars 36
Bangladesh US $ 79
Barbados US $ 202
Belarus Euro 62
Belgium Euro 146
Belize US $ 152
Benin Euro 111
Bolivia US $ 78
Bosnia-Herzegovina Euro 75
Botswana Pula 826
Brazil Reals 409
Brunei US $ 88
Bulgaria Euro 91
Burkina Faso CFA Francs 58,790
Burundi Euro 73
Cambodia US $ 99
Cameroon Euro 120
Canada C$ 177
Cape Verde Islands Euro 65
Central African Republic Euro 94
Chad Euro 121
Chile US $ 106
China (People's Republic) US $ 127
Colombia US $ 94
Comoro Island Euro 122
Cook Islands NZ $ 211
Cote D'Ivoire Euro 119
Costa Rica US $ 116
Croatia Euro 99
Cuba US $ 114
Cyprus Euro 117
(continued)

Czech Republic Euro 90
Democratic Republic of Congo US $ 164
Denmark Danish Kroner 2 328
Djibouti US $ 99
Dominican Republic US $ 99
Ecuador US $ 163
Egypt Egyptian Pounds 873
El Salvador US $ 98
Equatorial Guinea Euro 166
Eritrea US $ 109
Estonia Euro 92
Ethiopia US $ 92
Fiji US $ 102
Finland Euro 171
France Euro 129
Gabon Euro 160
Gambia Euro 74
Georgia US $ 95
Germany Euro 125
Ghana US $ 130
Greece Euro 138
Grenada US $ 151
Guatemala US $ 114
Guinea Euro 78
Guinea Bissau Euro 59
Guyana US $ 118
Haiti US $ 109
Honduras US $ 186
Hong Kong Hong Kong $ 1 395
Hungary Euro 92
Iceland ISK 25 466
India Indian Rupee 5 932
Indonesia US $ 86
Iran US $ 120
Iraq US $ 125
Ireland Euro 139
Israel US $ 209
Italy Euro 125
Jamaica US $ 151
Japan Yen 16 424
Jordan US $ 201
Kazakhstan US $ 100
Kenya US $ 138
(continued)
Schedules 333

Kiribati Australian $ 233
Korea Republic Korean Won 184 642
Kuwait (State of) Kuwait Dinars 51
Kyrgyzstan US $ 172
Laos US $ 92
Latvia US $ 150
Lebanon US $ 158
Lesotho RSA Rand 750
Liberia US $ 112
Libya US $ 120
Lithuania Euro 154
Macao Hong Kong $ 1 196
Macedonia (Former Yugoslav) Euro 100
Madagascar Euro 58
Madeira Euro 290
Malawi Malawi Kwacha 31 254
Malaysia Ringgit 382
Maldives US $ 202
Mali Euro 178
Malta Euro 132
Marshall Islands US $ 255
Mauritania Euro 97
Mauritius US $ 114
Mexico Mexican Pesos 1 313
Moldova US $ 117
Mongolia US $ 69
Montenegro Euro 94
Morocco Dirhams 1 081
Mozambique US $ 101
Myanmar US $ 123
Namibia RSA Rands 950
Nauru Australian $ 278
Nepal US $ 64
Netherlands Euro 122
New Zealand NZ $ 206
Nicaragua US $ 90
Niger Euro 75
Nigeria US $ 242
Niue New Zealand $ 252
Norway NOK 1 753
Oman Rials Omani 77
Pakistan Pakistani Rupees 6 235
Palau US $ 252
Palestine US $ 147
(continued)

Panama US $ 105
Papa New Guinea Kina 285
Paraguay US $ 76
Peru US $ 139
Philippines US $ 122
Poland Euro 88
Portugal Euro 87
Qatar Qatar Riyals 715
Republic of Congo Euro 149
Reunion Euro 164
Romania Euro 83
Russia Euro 330
Rwanda US $ 102
Samoa Tala 193
Sao Tome & Principe Euro 160
Saudi Arabia Saudi Riyals 512
Senegal Euro 113
Serbia Euro 83
Seychelles Euro 132
Sierra Leone US $ 90
Singapore Singapore $ 232
Slovakia Euro 102
Slovenia Euro 106
Solomon Islands Sol Islands $ 1 107
South Sudan US $ 146
Spain Euro 112
Sri Lanka US $ 100
St. Kitts & Nevis US $ 227
St. Lucia US $ 215
St. Vincent & The Grenadines US $ 187
Sudan US $ 200
Suriname US $ 107
Swaziland RSA Rand 1 367
Sweden Swedish Kronor 1 317
Switzerland S Franc 201
Syria US $ 185
Taiwan New Taiwan $ 4 015
Tajikistan US $ 97
Tanzania US $ 129
Thailand Thai Baht 4 956
Togo CFA Francs 64 214
Tonga Pa'anga 251
(continued)
Schedules 335
Trinidad & Tobago US $ 213

Tunisia Tunisian Dinar 198
Turkey Euro 101
Turkmenistan US $ 125
Tuvalu Australian $ 339
Uganda US $ 111
Ukraine Euro 131
United Arab Emirates UAE Dirhams 699
United Kingdom British Pounds 102
Uruguay US $ 133
USA US $ 155
Uzbekistan Euro 80
Vanuatu US $ 166
Venezuela US $ 294
Vietnam US $ 91
Yemen US $ 94
Zambia US $ 119
Zimbabwe US $ 123
Other countries not listed US $ 215
Glossary
Accrued
Amounts that accrue to you are included in gross income. For tax purposes ‘accrued’ means
unconditionally entitled to.
Acquired
Something is acquired when a person buys or receives it.
Alimony
This is the money payable by a husband to his wife or former wife, or by a woman to her husband
or former husband, after they are separated or divorced.
Amending Acts
This is legislation used to change the Income Tax Act 58 of 1962 on an annual basis, so that the
recommendations of the budget are legally brought into the income tax regime.
Appeal
When a taxpayer is not happy with the way SARS has dealt with a certain aspect of his or her tax,
the taxpayer is entitled to submit his or her reasoning to SARS and to disagree. This is known as an
appeal.
Arm’s length
This is a transaction that takes place at a rate that is fair, where the price of the transaction is not
influenced by familiarity.
Beneficiary
A beneficiary is a person who benefits by receiving something.
Bills
This is legislation in draft format, before the President signs it and it becomes an Act.
Binding
A binding decision is a decision that has to (must) be applied.
Budget deficit
A budget deficit occurs when the government spends more than it earns. The government then has
to borrow money.
Consideration
This is the price paid for goods and services. This price is inclusive of VAT.
Corporeal
Something that is corporeal is physical, material and tangible, for example, a motor vehicle.
Deemed
When you deem that something has happened, you consider/ regard something as happened. If
you deem that something fits a particular definition, you treat it as fitting the definition.
Dependant
A dependant is the taxpayer’s spouse or partner, dependent children or other members of the
taxpayer’s immediate family or any other person who, under the rules of a medical scheme, is
recognised as a dependant of the taxpayer.
337
Dividends
An amount paid by a corporation to its shareholders. It is a fixed amount per share held.
Donee
A donee is a person who receives a donation.
Employee
An employee is the person who does the work in return for a wage or salary.
Employer
An employer is the person (or organisation) who pays the wage or salary.
Exempt income
This is income that is defined in section 10 of the Income Tax Act 58 of 1962. Exempt income refers
to income that has been included in terms of the definition of gross income, but which is not subject
to income tax and can therefore be deducted from gross income.
Fiduciary, usufructuary or other like interests
A person who has such an interest in an asset does not own the asset, but has the legal right to use
it.
Gratuitous
A gratuitous gift is given or received freely, without any obligation and without the exchange of any
value in return for the gift.
Gross
A gross amount is the amount before any deductions or reductions.
Gross income
This is a term that is defined in section 1 of the Income Tax Act 58 of 1962, and includes all types of
income that are subject to taxation.
Handicapped
A handicapped person is a deaf or blind person; or someone who requires an artificial limb, who
permanently uses a wheelchair or crutches; or any person who suffers from mental illness.
In community of property
This refers to the legal side of a marriage and the contract whereby two people agree that all
assets acquired during their marriage will be jointly owned by them and that all liabilities will be
jointly owed by them.
Income
Income is defined in the Income Tax Act 58 of 1962 as being gross income less exempt income.
Incorporeal
Something that is incorporeal has no physical existence; it is intangible. Examples are goodwill and
intellectual property.
Intangible
Something intangible cannot be touched.
Intention
The intention of a decision is the aim or purpose for which the decision is made.
Interest in
An interest in something is a legal concern, title or right to property.
Glossary 339
Jointly and severally liable

Where people are jointly and severally liable, the creditor can recover the full amount owed from all
or any of the parties.
Legislation
This refers to anything that represents the law.
Net
A net amount is an amount that has been reduced by deductions or reductions.
Net normal tax
Net normal tax refers to the amount of normal tax left over once the rebates have been deducted.
Non-retirement-funding income
This is income other than retirement funding income, which actually means any income that was not
used in the calculation of pension or provident fund contributions (refer to retirement funding
income, below).
Normal tax
This is based on taxable income and is calculated using the income tax tables for the specific year,
or, in certain circumstances, the rating formula.
Objective
Something that is objective actually exists, in other words, it is factual.
Odometer
This is the instrument in a motor vehicle that measures the distance that it has travelled.
Offshore
Offshore income comes from outside the borders of South Africa, for example from Europe or
America.
Onus of proof
This is the responsibility to prove something.
Ordinarily resident
The place in which someone is ordinarily resident is the place where he or she normally, as a rule,
resides and would naturally return to after his or her wanderings.
Passport stamps
These are date stamps on an official document, issued by a government, certifying the holder’s
identity and citizenship, and entitling the holder to travel under its protection to and from foreign
countries.
Pension fund
A pension fund is directly linked to employment. Monthly amounts, called contributions, are
deposited into this fund each month. When an employee retires, the fund provides a lump-sum
payment as well as a retirement annuity, which is usually paid on a monthly basis. This annuity
replaces the salary that the employee is no longer earning.
Physical presence test
This is a test to determine the number of days of presence in South Africa.
Pro rata
Where an amount relates to a year, for example, and must be reduced to a monthly amount, we say
that the amount must be reduced pro rata. A pro rata payment is therefore a proportion of the
whole payment based on the amount of time that has elapsed.
Provision
A provision in a law is an arrangement included in that law. It is a stipulation that something must
be done, or of how it must be done.
Public benefit organisations
These are organisations classified as public benefit organisations on the basis of certain public
benefit activities they engage in. Such organisations must comply with all the requirements of the
Ninth Schedule of the Income Tax Act 58 of 1962, and the organisation must apply for this status,
which is granted (or not) by SARS.
Rebates
Every taxpayer is entitled by law to reduce (make smaller) his or her normal tax by the prescribed
rebates. Rebates are announced annually by the Minister of Finance.
Remuneration
This is a term that relates to income earned from employment. Remuneration has a specific
definition that can be found in the Fourth Schedule of the Income Tax Act 58 of 1962.
Retirement funding income
Pension fund contributions are normally calculated as a percentage of certain types of income
earned by an employee. The pension fund will decide, according to its rules, what income will be
used when calculating the contributions. Thus any income from employment on which pension fund
contributions have been calculated will be referred to as retirement funding income.
Subjective
A person’s view is subjective, in other words, prejudiced or biased.
Tangible
Something that is tangible can be touched.
Tax liability
This is the amount owing to SARS once the net normal tax has been reduced by any pre-paid
taxes, for example employees’ tax and provisional tax.
Taxable benefit
A taxable benefit is the taxable portion of an amount received.
Taxable income
Taxable income is defined in the Income Tax Act 58 of 1962 as being income less allowable
deductions.
Trade
Trade is business conducted for a profit. It is defined as follows in section 1 of the Income Tax Act
58 of 1962:
‘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 or any design
or any trade mark or any copyright or any property which is of a similar nature.’
Index
par par
A Disability ........................................................ 2.9.2.2
Accrued to ........................................................4.2.5 Dispute resolution............................................. 1.9.2
Actually incurred ..............................................5.2.2 Dividends ..................................................... 4.3; 4.4
Alimony received .................................................4.3 Dividends withholding tax ................................ 2.9.4
Allowances ..........................................................6.3 Division of Revenue Bill ....................................... 1.4
Alternate dispute resolution ..............................1.9.2 Donations to approved bodies ......................... 3.4.3
Amounts received in respect of services Donations tax....................................................... 7.3
rendered, employment or holding an office .....4.3 Basic exemption from, for natural persons ... 7.3.2
Annuities ..............................................................4.3 Exemptions from .......................................... 7.3.2
Assets ..................................................................5.6 Doubtful debts .............................................. 5.3; 5.5
Awards for diseases ............................................4.4
E
B eFiling ........................................................ 2.7.2; 2.8
Bad debts .....................................................5.3; 5.5 Employees’ tax .......................................... 9.3.1; 8.2
Base cost ..........................................................7.2.6 Balance of remuneration ............................... 8.2.2
Calculation of ................................................ 8.2.2
Benefits to relatives of employees ..................6.2.11
Interest and penalties.................................... 8.2.1
Binding general ruling ......................................1.9.1 Payment of .................................................... 8.2.3
Bravery award ..................................................6.2.1 Employer-owned insurance policies .............. 6.2.12
Budget (the) ..........................................1.2, 1.3, 1.4 Employer contributions to medical funds ......... 6.2.8
Bursaries .............................................................4.4 Employer contributions to retirement funds ... 6.2.13
C Employment tax incentive ................................ 8.2.4
Capital Estate duty........................................................... 7.4
Gain ...............................................................7.2.3 Deductions .................................................... 7.4.3
Loss ...............................................................7.2.3 Claim by surviving spouse ............................ 7.4.3
Nature of ........................................................4.2.6 Domestic policies of insurance on the life
of the deceased ......................................... 7.4.1
Capital gains tax (CGT) Exempt donations ......................................... 7.4.1
Aggregate gain or loss ..................................7.2.4 Lump-sum benefits ....................................... 7.4.1
Asset .............................................................7.2.1 Property ......................................................... 7.4.1
Base cost ......................................................7.2.6 Property deemed to be property................... 7.4.1
Disposal ........................................................7.2.2
Property of which the deceased was
Death .............................................................7.4.5
competent to dispose of for own benefit ... 7.4.1
Exclusions .....................................................7.2.7
Valuation of property ..................................... 7.4.2
Losses ...........................................................7.2.8
Proceeds .......................................................7.2.5 Excise duty .......................................................... 9.4
Carrying on a trade ..........................................5.2.1 Exclusions from capital gains tax ..................... 7.2.7
Cash or otherwise .............................................4.2.4 Exempt income.................................................... 3.3
Consideration ...................................................9.2.5 Exempt from provisional tax ................................ 8.3
Credit notes ......................................................9.2.3 Exempt supplies ............................................... 9.2.5
Customs duty ......................................................9.4 Expenditure and losses ....................................... 5.2
Arrival of goods in South Africa .....................9.4.4
Declaration ....................................................9.4.5 F
Goods not subject to customs ......................9.4.6 Final tax liability ................................................ 2.9.4
Offences ........................................................9.4.7
Fines .................................................................... 5.3
D Foreign
Death, disability, illness or unemployment policy dividends.......................................................... 4.4
benefits .............................................................4.4 income.............................................................. 3.2
pensions ........................................................... 4.4
Debit notes .......................................................9.2.3
Free or cheap services..................................... 6.2.6
Deductions ..........................................................3.4
Fringe benefits.............................................. 4.3; 6.2
Deemed supplies .............................................9.2.5
Funeral benefits ................................................... 4.4
Determined value (definition of) .............6.2.3; 6.3.1
341
par par
G Ordinarily resident ............................................ 4.2.2
General aspects of taxation ................................1.8 Other income ....................................................... 2.3
General deductions .............................................5.2 Output tax ......................................................... 9.2.5
Gratuities from employers ...................................4.3
P
Gross income ...............................................3.2; 4.2
Pay-as-you-earn tax (PAYE) ............................. 8.2.1
H Payments basis for value-added tax (VAT) ...... 9.2.2
Health promotion levy .......................................9.5.4 Penalties ............................................................ 2.11
Home office expenses .........................................5.3 Pension fund contributions ............................... 3.4.2
I Personal-use assets exclusion ......................... 7.2.7
Improvements ......................................................5.5 Physical-presence test ..................................... 4.2.2
In the production of income .............................5.2.2 Pre-retirement lump sums ................................... 4.3
Income protection contributions .......................3.4.1 Premiums paid .................................................... 5.5
Input tax ............................................................9.2.8 Primary residence exclusion ............................ 7.2.7
Intention ............................................................4.2.6 Proceeds .......................................................... 7.2.5
Interest and dividends received from tax free Prohibited deductions ......................................... 5.3
investments ....................................................... 4.4 Property ............................................................ 7.4.1
Interest exemption ...............................................3.3 Provident fund contributions ............................ 3.4.2
Interest paid to non-residents .............................4.4 Provisional tax ..................................................... 8.3
Interpretation rules ...........................................1.9.1 Additional taxes, interest and penalties ........ 8.3.2
Calculation .................................................... 8.3.1
IRP 5 ....................................................................2.4
ITA 34 .........................................................2.9; 2.10 R
Invoice basis for value-added tax (VAT) ..........9.2.2 Rebates ............................................................ 2.9.2
K Recoupment ........................................................ 4.3
Know-how payments ...........................................4.3 Registration as a taxpayer................................... 2.6
Relatives of employees .................................. 6.2.11
L Repairs ................................................................ 5.5
Lease premiums ..................................................4.3 Restraint of trade ................................... 4.3; 5.3; 5.5
Legal expenses ............................................5.3; 5.5 Retirement annuity fund contributions.............. 3.4.2
Legislating the budget ....................................... 1.4 Retirement fund contributions .......................... 3.4.2
Liable for income tax ...........................................2.5 Retirement lump-sum benefits ............................ 4.3
Limitation of capital losses ...............................7.2.8 Resident of the Republic .................................. 4.2.2
Long-service award ..........................................6.2.1 Residential accommodation ............................. 6.2.5
Low-interest debt ..............................................6.2.7 Right of use of an asset .................................... 6.2.2
Lump-sum benefits .....................................4.3;7.4.1 Right of use of a motor vehicle ......................... 6.2.3
M
S
Meals, refreshments and vouchers ..................6.2.4
Salary................................................................... 2.2
Medical expenses .........................................2.9.2.2
Sale of assets ...................................................... 7.2
Medical services ..............................................6.2.9
Securities transfer tax ....................................... 9.5.2
Medical tax credits ........................................2.9.2.2
Services rendered ............................................... 4.3
Medical fund contributions ...............................6.2.8
Skills development levy (SDL) .......................... 9.3.2
N Small-business assets exclusion...................... 7.2.7
National Budget, the ............................................1.2 South African Revenue Service (SARS) .............. 1.7
Net normal tax liability ......................................2.9.3 Specific inclusions in gross income .................... 4.3
Non-residents ......................................................4.4 Standard rate supplies ..................................... 9.2.5
Normal tax ...........................................................2.9 Subjective tests ................................................ 4.2.6
Rebates .........................................................2.9.2 Subsistence allowance..................................... 6.3.2
Not of a capital nature ......................................5.2.2 Sugar Tax ......................................................... 9.5.4
Notional input tax ..............................................9.2.8
T
O
Tax
Objective tests ..................................................4.2.6 Administration Act ............................................ 1.6
Occupational Injuries and Diseases ................9.3.4 Invoices ......................................................... 9.2.3
Index 343
par par
Tax (continued ) Y
Ombud (the) ..................................................1.6.1 Year of assessment ................................ 4.2.3; 5.2.2
Returns .............................................................2.7
Threshold .........................................................2.5
Tax-free investments ...........................................4.4
Z
Time-apportionment base cost ........................7.2.6
Zero-rated supplies .......................................... 9.2.5
Trade ................................................................5.2.1
Transfer duty ....................................................9.5.1
Travel allowance ...............................................6.3.1 INDEX OF FORMS
Turnover tax ......................................................9.5.3 EMP 101e ......................................................... 8.2.1
U EMP 201 ........................................................... 9.3.3
Unemployment Insurance EMP 501 ........................................................... 8.2.1
Fund (UIF) .......................................3.3; 4.4; 9.3.3 IRP5/IT3(a)........................................................... 2.4
V IRP 6 .................................................................... 8.3
Valuation date value .........................................7.2.6 IT 3-01 ................................................................. 2.6
Value-added tax ...........................................5.6, 9.2 IT 144................................................................ 7.3.3
Accounting basis ..........................................9.2.2 ITR 12 .................................................................. 2.8
Administration ...............................................9.2.3 ITR-DD ........................................................... 2.9.2.2
Calculating ....................................................9.2.4
Payslip ................................................................. 2.2
Imported goods .............................................9.4.2
Income tax .....................................................9.2.9 Request for correction ....................................... 2.10
Input tax ........................................................9.2.8 REV267 ................................................................ 7.4
Output tax ......................................................9.2.5 TT01.................................................................. 9.5.3
Time of supply ...............................................9.2.6
Transfer duty .................................................9.5.1 TT02.................................................................. 9.5.3
Returns ..........................................................9.2.3 TT03.................................................................. 9.5.3
Registration ...................................................9.2.1 UI-19 ................................................................. 9.3.3
Value of supply ..............................................9.2.7 VAT101 ............................................................. 9.2.1
W VAT201 ............................................................. 9.2.3
War pensions .......................................................4.4 VAT264 ............................................................. 9.2.3
Wear and tear allowance ..............................5.3; 5.5 W.As 8 .............................................................. 9.3.4

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Taxation of Individuals Simplified

First Edition 2008 Sixth Edition 2013

Editor: Mandy Jonck

Technical Editor: Maggie Talanda

1 Introduction to the Governmental

OUTCOMES OF THIS CHAPTER

After studying this chapter, the reader should be able to

The following concepts will be dealt with in this chapter:

1.2 The National Budget

Planning is important in order to keep an organisation operational. Therefore, a good accounting

Figure 1.1: Where the money comes from

Figure 1.2: How the money will be spent

The full document is available at http://www.treasury.gov.za/documents/national%20budget/2017/

The first two stages will be discussed in the following paragraphs.

1.3 Drafting the budget

Stage one of the budgetary cycle is sub-divided into eight stages:

Stage One: The Fiscal Framework and policy prioritisation

Stage Two: National and provincial inputs

Stage Four: Combining national and provincial MTEFs

Stage Five: Budget Council recommendations

Stage Six: Extended Cabinet discussion

Stage Seven: Finalising national and provincial MTEFs

Stage Eight: Compiling budget documents

Figure 1.4: Visual summary of the budget process

Figure 1.5: How the budget is put together

1.4 Legislating the budget

Bills and Acts

1.5 The Income Tax Act 58 of 1962 (as amended)

The term ‘date of promulgation’ of an amendment Act

Figure 1.6: The first page of a typical Government Gazette

1.6 The Tax Administration Act 28 of 2011 (as amended)

1.6.1 The Tax Ombud

1.7 The South African Revenue Service

SARS is responsible for administering the following taxes:

Taxable income Rate of tax

Turnover Marginal Rates (R)

Taxable income (R) Rate of tax

J Capital gains tax (CGT)

J Value-added tax (VAT)

J Securities transfer tax

J Skills development levy (SDL)

J Unemployment Insurance Fund (UIF)

J Air passenger tax

1.8 General aspects of taxation

1.8.2 Types of taxation

Table 1.3: Types of taxation

(a) What the tax is levied on (b) Method used to calcu-

1.9 Order of authority and interpretation of tax law

1.9.1 Interpretation rules

1.9.2 Dispute resolution between SARS and taxpayers

following graphic in terms of the Dispute Resolution Process:

Figure 1.7: Dispute Resolution Process

J Objection and appeal

J Alternative dispute resolution (ADR)

J The Tax Board

J Supreme Court of Appeal (previously known as the Appellate Division)

J Citation of court cases

Table 1.4: References to the different courts

Service delivery and procedural issues

Figure 1.8: Process for complaints (http://www.sars.gov.za/Contact/How-Do-I/Pages/Lodge%20a%

Figure 1.9: Steps in the dispute resolution process

1.11 Test your knowledge

OUTCOMES OF THIS CHAPTER

After studying this chapter, the reader should be able to