GROSS INCOME- SPECIAL

INCLUSIONS
SPECIAL INCLUSIONS CHAPTER 4
 INTRODUCTION
• The definition of gross income includes a list of specific amounts in paragraphs (a) to (n) (of the
definition in the Act), which are included over and above the amounts already included in gross income
under the general definition of gross income discussed.

• This means that, although an amount may be excluded from the definition of gross income because it did
not comply with any one of the criteria of the definition, the specific inclusions contained in paragraphs
(a) to (n) have the effect that amounts covered by the provisions of these paragraphs are nevertheless
included in the gross income of the taxpayer.

• Special inclusions listed in the definition of gross income are included in gross income, even though they
are of a capital nature.

• The special inclusions relating to a business entity are discussed in the following slides.
 LEASE PREMIUMS
• A lease premium is an amount that the lessee (person renting the property) pays to the lessor
(person owning the property and who is renting it out) in addition to the monthly rental.
• It is a once-off payment that is usually made at the beginning of the lease period.
• The full amount of the lease premium is included in the lessor's income in the year of
assessment in which it is received or when it accrued to the lessor.
 LEASEHOLD IMPROVEMENTS
• A lease agreement may specify that the lessee be obliged to erect/effect improvements on the leased land
or to the leased buildings.

• This means that the person who is renting the property will incur costs to improve or extend the property,
thereby increasing the value of the asset for the lessor (owner).

• The value of the improvements effected to the property must be included in the gross income of the lessor
in the year of assessment in which the agreement was concluded.

• The value to be included is the amount stipulated in the lease agreement as the value to be expended on
the lease improvements.

• If the actual value of the improvements (e.g. R700 000) is more than the amount stipulated in the
agreement (e.g. R550 000), then the amount to be included in gross income remains the amount in the
agreement (R550 000).
PROCEEDS FROM THE DISPOSAL OF
CERTAIN ASSETS
• If a taxpayer sells an asset that was manufactured, produced, constructed or assembled by
him, then the full proceeds received by him must be included in gross income.
• In other words, this disposal will not be treated as a transaction of a capital nature because
he manufactured the asset.
• Note that the proceeds will still be included in gross income, even if he used the asset as a
capital asset and then disposed of at a later stage.
DIVIDENDS

• Any amount received or accrued by way of dividends (local and foreign

dividends) is included in gross income.
• There are exemptions pertaining to certain dividends, but the dividend
received or accrued must still be included in gross income first.
 KEY-MAN INSURANCE POLICY PROCEEDS
• An insurance policy can be taken out on the lives of certain people in a business entity, for example the
director or a specific employee.

• When this person is not available to the company any longer, the policy will pay out an amount to the
business entity.

• This amount is included in the gross income of the business entity, if the business entity was entitled to
claim the insurance premiums in the current or previous year of assessment.
RECOUPMENTS (PAR N)
• When a taxpayer sells a capital asset, the recoupment (for income tax purposes) pertaining to this
transaction must be calculated. (This calculation is dealt with later.

• The recoupment amount must be included in gross income.

EXEMPT INCOME
CHAPTER 6
 EXEMPT INCOME
• You now have an understanding of which items will be included in gross income – either by
means of the gross income definition or by means of the sections pertaining to special
inclusions.
• The next component of the framework, namely exempt income, is deducted from gross
income.
• Exempt income refers to certain types of income that are included in gross income but that the
Income Tax Act does not want to subject to tax, that is, they are not regarded as income and
are therefore deducted from gross income to calculate total income.
• Be very careful with your use of terminology. Exempt income is very different from deductions.

• When we refer to income, we say that it is either taxable or exempt (depending on the rules).
EXEMPT INCOME
• Exemptions are contained in section 10 of the Income Tax Act, and may exempt the taxpayer (e.g.
public benefit organisations) from paying normal income tax or may exempt the type of income (e.g.
government grants received) fully or partially from normal income tax.

• Some of the taxpayers that are exempt from tax include

• any level of government in the Republic
• any institution, board or body, which as its principal objective conducts scientific, technical or industrial research
• body corporates established in terms of the Sectional Titles Act 95 of 1986
• share-block companies established in terms of the Share Blocks Control Act 59 of 1980
• public-benefit organisations
• pension funds, retirement annuity funds and benefit funds
• recreational clubs approved by the Commissioner in terms of section 30A of the Income Tax Act
EXEMPT INCOME
• Public benefit organisations mainly comprise non-profit companies incorporated with the main
objective of advancing public benefit activities and approved as such by SARS. These activities
include educational, religious,cultural and environmental conservation activities.

• The exemptions in respect of certain taxpayers apply to normal income tax only, and such taxpayers
may still be liable for other forms of taxation, such as value-added tax (VAT).
EXEMPT INCOME
• The types of income, which are exempt for a South African enterprise, are the following:
• dividends
• government grants (an amount received from government in terms of any programme or scheme that has been
approved in the national annual budget process will be exempt from normal tax)

• Although certain amounts may be exempt from income tax (e.g. dividends in certain circumstances),
note that these amounts are nevertheless first included in gross income and then exempted.

• Once the second component of the framework, namely exempt income, has been calculated, the
relevant exempt amounts are deducted from gross income.

• The result of this calculation is "income".

EXEMPT INCOME
• Although certain amounts may be exempt from income tax (e.g. dividends in certain circumstances),
note that these amounts are nevertheless first included in gross income and then exempted.

• Once the second component of the framework, namely exempt income, has been calculated, the
relevant exempt amounts are deducted from gross income.

• The result of this calculation is "income".

 SUMMARY
Income is like the contents of a basket – the amounts contained in the
basket are subject to income tax.
Using this analogy, in line with the definition of gross income, certain
amounts are put into the basket.
The special inclusions make us put more into the basket than we may
have included in the basket during the first round.
Finally, exempt income provisions allow us to take some amounts out of
the basket.
Remember, however, that you cannot take an amount out of the basket if
it was not in the basket in the first place. Therefore, what is left in the
basket is what we refer to as income.
POSSIBLE ASSESSMENT METHOD
• determine, with reference to the criteria established, whether a specific legal entity will be classified as a resident for tax
purposes

• list the requirements of the gross income definition, together with the applicable case law
• apply the requirements of the gross income definition to a practical situation, providing reasons why an amount should be
included in gross income or not

• state the year of assessment in a practical situation

• apply the subjective and objective tests to determine whether a transaction is of a capitalnature or not
• determine, in a practical case study, which amounts are specifically included in gross income
• determine, in a practical case study, the amounts that will be exempt from income tax
• apply the special inclusions to a taxable income calculation
• apply exempt income to a taxable income calculation
• calculate income (as defined)