© Gareth Cotten.

MODULE 1

Part 2: Basic tax

concepts for
individuals
Table of contents
1. Introduction ................................................................................................................. 4
2. Exempt income ............................................................................................................ 4
2.1 Introduction ..................................................................................................................... 4
2.2 Pensions, compensation, and foreign receipts ............................................................... 4
2.2.1 Foreign diplomats and subjects................................................................................ 4
2.2.2 War pensions and compensation ............................................................................. 5
2.2.3 Foreign pensions ...................................................................................................... 5
2.3 Interest ............................................................................................................................ 5
2.3.1 Interest and foreign dividends ................................................................................. 5
2.3.2 Non-residents ........................................................................................................... 6
2.4 Dividends ......................................................................................................................... 6
2.4.1 Collective investment scheme in property............................................................... 6
2.4.2 Foreign dividends ..................................................................................................... 6
2.5 Employment .................................................................................................................... 7
2.5.1 Uniforms and relocation benefits............................................................................. 7
2.5.2 Relocation benefits ................................................................................................... 7
2.5.3 Broad-based employee share plans ......................................................................... 7
2.5.4 Employment on ships ............................................................................................... 8
2.5.5 Employment outside South Africa ............................................................................ 8
2.6 Miscellaneous .................................................................................................................. 8
2.6.1 Royalties to non-residents........................................................................................ 8
2.6.2 UIF benefits............................................................................................................... 8
2.6.3 Bursaries and Scholarships ....................................................................................... 8
2.6.4 Alimony and maintenance........................................................................................ 9
2.6.5 Annuities ................................................................................................................... 9
3. Deductions................................................................................................................... 9
3.1 Introduction ..................................................................................................................... 9
3.2 Retirement contributions .............................................................................................. 10
3.4 Medical Expenses .......................................................................................................... 10
3.4.1 Medical aid contributions....................................................................................... 10
3.4.2 Unrecoverable medical expenses........................................................................... 11
3.4.3 Limitations .............................................................................................................. 11
4. Comprehensive examples ........................................................................................... 11
4.1 Example 1 ...................................................................................................................... 12
4.2 Example 2 ...................................................................................................................... 13
5. eFiling ........................................................................................................................ 14
5.1 Introduction ................................................................................................................... 14
5.2 List of eFiling services .................................................................................................... 14
5.3 Registration for eFiling .................................................................................................. 15
5.4 Benefits of eFiling .......................................................................................................... 16
6. Conclusion ................................................................................................................. 16

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7. Bibliography............................................................................................................... 16

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Learning outcomes:

LO4: Explain how exempt income and deductions work.

LO5: Review basic tax concepts by working through a comprehensive example.

LO6: Describe the SARS eFiling service

1. Introduction
These module notes will further explore the fundamental defined terms of the Income Tax
Act ("the Act"), and how they interact to establish and determine an individual's income tax
liability.

2. Exempt income
2.1 Introduction
Section 10(1) of the Act provides that certain amounts that are included in gross income are
exempt from income tax. This means that income tax does not apply to these amounts, and
they are deducted from gross income when determining taxable income. Below, we set out
some of the more common forms of exempt income received by individuals.

2.2 Pensions, compensation, and foreign receipts

2.2.1 Foreign diplomats and subjects
In terms of section 10(1)(c) of the Act, salaries of certain foreign officials are exempt from
income tax. The most important ones are:

• Amounts received by a person stationed in South Africa for purposes of an office held
as an official for a foreign government where that person is not ordinarily resident in
South Africa. This exemption applies to foreign diplomats, consuls and ambassadors.

• Amounts received by a person who provides domestic or private services to a foreign

diplomat and that person is not a South African citizen or ordinarily resident in South
Africa.

• Amounts received by a person who is a foreign subject who is temporarily employed

in South Africa and the exemption is authorised in terms of an agreement between
South Africa and the foreign state.

• Amounts received by a person who is an employee of a foreign government agency

or multi-national organisation specified in sections 10(1)(bA)(ii) or 10(1)(c)(vi).

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2.2.2 War pensions and compensation
According to section 10(1)(g),(gA), and (gB) of the Act, the following income is exempt from
tax:

• Any amounts received as a war pension or as an award or compensation for disease

contracted by an employee from mining operations, are exempt from tax.

• Compensation received in terms of the Workmen's Compensation Act, 30 of 1941 or

the Compensation for Occupational Injuries and Diseases Act, 130 of 1996 are
exempt. Certain pensions paid in respect of such injuries are also exempt.

• Any compensation paid by an employer in respect of the work-related death of an

employee is exempt to the extent that it does not exceed R300,000.

• Amounts received from the Road Accident Fund as compensation, for bodily injury or
death of any person, are exempt from tax.

2.2.3 Foreign pensions

In terms of section 10(1)(gC), a foreign pension will be exempt from income tax where:

• It is received by or accrues to a resident from the social security system of another

country.

• It is received from a source outside of South Africa in respect of employment outside

of South Africa, provided that the payment is not made by the South African
government or in respect of services rendered in South Africa for at least 2 of the 10
years preceding retirement. Where the 2-year period is exceeded, a proportionate
amount of the foreign pension will be exempt.

2.3 Interest
2.3.1 Interest and foreign dividends
Section 10(1)(i) of the Act provides for an exemption from income tax in respect of the first
R23,800 of interest received from a source in South Africa. The exemption is increased to
R34,500 for any person 65 years or older.

Example:

If Mr Jones, a 70-year-old pensioner, receives R45,000 in interest during the year of

assessment, the first R34,500 would be exempt, and the remaining R10,500 would be subject
to income tax.

In the past, an amount of R3,700 of this exemption could be utilised to exempt foreign
dividends and interest received from a source outside South Africa. However, this amount of
R3,700 has fallen away from the 2013 tax year. Foreign interest and dividends are thus subject
to income tax in the hands of a South African taxpayer. Foreign dividends, however, are

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exempt “if the shareholder holds at least 10% of the equity shares and voting rights in the
foreign company declaring the dividend” (Deloitte, 2015). Also, foreign dividends received by
individuals will qualify for a deduction of 25/45 of the dividend, thus resulting in a maximum
tax rate of 20% if the individual is being taxed at the maximum marginal rate of 45%.

2.3.2 Non-residents
From 1 March 2015, a 15% withholding tax applies to interest income received by a non-
resident from a South African source. This means that, although the income may strictly be
exempt once the non-resident receives it, it will first have had 15% of it deducted and withheld
by the party paying it (which would be paid over to SARS). The interest is exempt from this
withholding tax, though, if is payable by any sphere of the South African government or a
bank.

2.4 Dividends
When a company decides to distribute profit to its shareholders, it would do so by means of
dividends, and the total amount of dividends declared would generally be shared between
shareholders in proportion to their shareholding. Section 10(1)(k) of the Act provides for a
general exemption from income tax for dividends. However, certain types of dividends are
excluded from the exemption, some of which are mentioned below.

2.4.1 Collective investment scheme in property

Dividends distributed from a portfolio of a collective investment scheme in fixed property are
not exempt from income tax. However, where those dividends are declared from capital
profits to a non-resident, they will qualify for exemption.

2.4.2 Foreign dividends

A dividend received from a non-resident company is not generally exempt from tax. The
section on “interest” (above) already touched on this, but there are exceptions and certain
foreign dividends will be exempt from income tax where that dividend:

• Was or will be subject to tax in South Africa;

• Is declared by a dual-listed company;

• Is declared by a controlled foreign company; or

The shareholder holds at least 10% of the equity shares and voting rights of the foreign
company.

Note:

The new dividend tax that was recently introduced marks a significant departure from the
previous regime of Secondary Tax on Companies (STC). Whereas before, the company paying
out dividends was liable to pay STC, now it is strictly becoming a tax on shareholders. While
this will be expanded on in a later module, the upshot is that, from 1 April 2012, the new

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dividends tax has replaced STC entirely. A “withholding tax”, dividends tax means that
companies are required to withhold 20% of the total dividends being distributed (previously
15%), and pay this over to SARS on behalf of the shareholders. The balance received by
shareholders would then continue to be exempt from income tax.

2.5 Employment
The value of various benefits and amounts received by an employee by virtue of, or in the
course of, their employment may be included in that employee's income. However, certain
types of income will be exempt from income tax in terms of the provisions of section 10 of
the Act.

2.5.1 Uniforms and relocation benefits

The cash value of a uniform is generally included in an employee's income. However, the
amount will be exempt from tax in terms of section 10(1)(nA) of the Act if the employee is
required to wear a special uniform while on duty and the uniform is clearly distinguishable
from ordinary clothing.

2.5.2 Relocation benefits

Where an employee is transferred to another place of employment and the employer pays
the relocation costs, which benefit can qualify for exemption in terms of section 10(1)(nB) if
the employer incurs expense in respect of the following costs:

• The cost of transfer of the employee

• The cost of appointment of the employee

• The cost of termination of employment

The following relocation costs are exempt:

• Transport of the employee, members of their household, and their personal

possessions.

• Certain costs in respect of settling in at the new residence and the sale of the previous
residence.

• The cost of temporary residential accommodation for a maximum of 183 days from
the date of appointment or transfer.

2.5.3 Broad-based employee share plans

Where an employee receives shares from his employer that constitute a "qualifying equity
share", the receipt will be exempt from normal tax in terms of section 10(1)(nC). The
exemption applies where the market value of the shares does not exceed R50,000 over a 5-
year period.

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2.5.4 Employment on ships
Where remuneration is received by or accrued to an officer or crewmember of a ship, that
remuneration is exempt from tax in terms of section 10(1)(o)(i) of the Act.

To qualify for the exemption the person must have been outside South Africa for 183 days in
aggregate in the year of assessment, and the ship must have been engaged in international
transportation of passengers or goods for reward (or in certain circumstances, mining related
activities on the seabed).

2.5.5 Employment outside South Africa

Where an employee derives any form of remuneration in respect of services rendered outside
South Africa, that remuneration will be exempt from income tax in terms of section 10(1)(o)(ii)
of the Act if:

• The employee was outside of South Africa for more than 183 days during any 12-
month period.

• The period referred to above includes 60 full days of continuous absence in that 12-
month period.

• The services were rendered in that period of absence.

• The services were rendered for and on behalf of an employer situated outside South
Africa.

This exemption has specific provisions dealing with the calculation of the days and special
provisions for apportionment of the exemption where the period exceeds a year.

From 1 March 2020, it should be noted that only the first R1.25 million of foreign employment
income is exempt. Any excess over and above this threshold will be taxed according to the
normal tax tables, less an adjustment for any foreign tax paid.

2.6 Miscellaneous
2.6.1 Royalties to non-residents
Any royalty or similar payment made to a non-resident is exempt from income tax in terms of
section 10(1)(l) of the Act, if that payment has been subject to the withholding tax (previously
12%, but changed to 15% on 1 January 2015) provided for in section 35 of the Act.

2.6.2 UIF benefits

Any UIF benefits or allowances payable are exempt from income tax.

2.6.3 Bursaries and Scholarships

Generally speaking, bursaries and scholarships are exempt from income tax in terms of the
provisions of section 10(1)(q) of the Act where they are granted to assist a person to study at

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a recognised educational or research institution. The tax treatment differs depending on
whether or not the bursary is awarded to an employee, their relative or an associated
institution, or a non-employee.

• A scholarship to an employee is exempt from tax, provided the employee is obliged

to repay the bursary if he fails to complete the studies.

• A scholarship to a relative of an employee is exempt to the extent that the employee's

remuneration does not exceed R600,000 and to a maximum of R60,000 per relative
in a year of assessment for higher education or R20,000 for basic education (up to
grade 12).

• A scholarship is exempt from income tax provided it is awarded to any person, without
restricting applicants to employees, their relatives or other institutions.

2.6.4 Alimony and maintenance

Section 10(1)(u) of the Act provides for an exemption from income tax for any amount
received by or accrued to a person from his or her spouse or former spouse, in respect of
alimony or an allowance granted under legal proceedings or under a separation agreement.

2.6.5 Annuities
Section 10A of the Act exempts the capital portion of certain annuities. An annuity is defined
as any amount payable under an annuity contract, for example, an agreement between a
purchaser and an insurer, where:

• The purchaser pays the insurer a lump sum.

• The insurer agrees to pay the purchaser, or their spouse, or surviving spouse, an
annuity until the expiry of a specified term or the death of the recipient.

• But, excluding an agreement for payment of an annuity under a provident fund,

provident preservation fund or retirement annuity fund.

3. Deductions
3.1 Introduction
Section 11 of the Act sets out the deductions that may be claimed from the income of a
taxpayer. This section of the module deals with deductions that apply in respect of individuals,
but not to the extent that they are carrying on trade (so, essentially, only for those individuals
who are employees, and not those running their own businesses). Those provisions will be
dealt with in a later module.

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3.2 Retirement contributions
In the 2016/2017 tax year, retirement reforms came into effect which substantially changed
the way retirement contributions are treated for tax deduction purposes. Whereas before,
pension fund and retirement annuity contributions were treated and calculated separately,
now all retirement vehicles receive the same treatment, whether they are pension funds,
provident funds or retirement annuity funds.

Under the new S11(k), individuals can deduct up to 27.5% of their remuneration or taxable
income (whichever is higher, but excluding retirement fund lump sum benefits and severance
benefits) as a deduction against their income. There is an annual limit to this deduction,
though, of R350,000. In effect, this means that lower-earning taxpayers are now able to claim
a larger tax deduction for retirement contributions than before, and high earners (earning
well over R1m a year) may now have a slightly lower deduction available to them.

When determining remuneration for the purposes of this section, the full amount of any travel
and subsistence allowance must be included, whereas any retirement fund lump sum or
withdrawal benefits is excluded. Passive income (such as rental income) and taxable capital
gains must also be included in taxable income when calculating the 27.5% limit.

Importantly, the deduction may not exceed the actual amount of the contribution. Any
contributions in excess of the annual threshold are carried forward to the following year and
deemed to be contributed in that year.

Example:

Khethiwe Legao is a senior manager at a commercial fishing company, and earned a salary of
R740,000 for the tax year. Wanting to build up her retirement savings as quickly as possible,
she contributed R148,000 to a provident fund during the year.

As this amount is 20% of her remuneration, it falls under the 27.5% threshold, and the entire
amount (which is also less than R350,000) will therefore be allowed as a deduction.

3.4 Medical Expenses

3.4.1 Medical aid contributions
The Act provides that a deduction will be allowed from a taxpayer's income for contributions
made to a registered medical aid fund or scheme in respect of that taxpayer; the taxpayer's
spouse, and any dependant of the taxpayer.

A dependant is defined to include a spouse, dependent child, or other members of the

taxpayer's immediate family in respect of whom that taxpayer is liable for family care and
support.

Up until the 2012 tax year, this medical aid contribution “concession” was in the form of a
deduction. Since the 2013 tax year, though, this has been changed to a tax credit system,
through the introduction of Section 6A. The difference is that, with the former, the deduction

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would reduce the taxable income of the taxpayer (before applying the tax tables); but now,
with the latter, the taxpayer receives a tax credit that reduces the total tax due after applying
the tax tables (in much the same way that the general tax rebates work).

The medical schemes tax credit in section 6A is equal to a monthly amount of:

• R364 in respect of the taxpayer

• R728 in respect of the taxpayer and one dependant

• R728 in respect of the taxpayer and one dependant plus R246 per additional
dependant

The monthly credit is a fixed credit, regardless of the actual contribution made by the taxpayer
– so the contribution can be more or less than the tax credit.

3.4.2 Unrecoverable medical expenses

Section 6B provides that a person may also claim a “deduction” for medical expenses
(including certain prescribed expenditure incurred in respect of any physical impairment or
disability) incurred but not recoverable from the medical aid fund in respect of the taxpayer
and their spouse, children, or dependants.

These may only be claimed in respect of expenses that have been paid by the taxpayer, not
merely incurred. They take the form of an additional medical expenses tax credit (replacing
the S18 deduction which applied until 1 March 2014), so again, they are deducted from the
total tax due after applying the tax tables in the tax calculation.

3.4.3 Limitations
If the taxpayer is 65 years of age or older, their S6B additional medical expenses tax credit is
one-third of medical aid contributions in excess of three times their S6A medical schemes tax
credit, plus one-third of other qualifying medical expenses. Similarly, a taxpayer under the age
of 65 who is disabled, or has a spouse or child who has a disability, as defined by the Act, may
also claim the S6B tax credit on the same basis.

For other taxpayers younger than 65 years of age, their S6B additional medical expenses tax
credit is one-quarter of medical aid contributions in excess of four times their S6A medical
schemes tax credit, plus one-quarter of other qualifying medical expenses – to the extent that
the excess medical aid contributions and other qualifying medical expenses exceed 7.5% of
the taxpayer’s taxable income.

This is a complex section of the tax law, and is best illustrated by use of an example:

A taxpayer contributes R36,000 a year to his medical aid, for himself and his wife. He also has
another R14,000 of medical expenses for the year that he has not claimed from medical aid.
Before medical deductions, his taxable income is calculated at R180,000 for the year.

He would be entitled to a S6A tax credit (rebate) of R8,736 (R728 X 12 months).

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He would also get a S6B tax credit for one-quarter of other expenses that exceed 7.5% of his
taxable income. As this latter figure was R180,000, any expenses exceeding R13,500 (7.5% X
R180,000) would be taken into account.

His further expenses would be R1,056 of medical aid contributions (R36,000 – R34,944, with
the latter figure being 4 times the S6A rebate) and the R14,000 worth of expenditure not
claimed, for a total of R15,056.

He would be allowed to take this into account to the extent that it exceeds the R13,500
calculated above. Remember that the S6B tax credit is only one-quarter of this, so his tax
credit here would thus be R1,556 (R15,056 – R13,500) divided by four, for a final S6B figure of
R389.

4. Comprehensive examples
4.1 Example 1
David Chauke is a youthful 68-year-old, still happily working as a warehouse manager for an
electronics retailer. He earns a monthly salary of R24,000 and receives a further R4,800 per
month in interest from an investment account he’s built up over the years. He has no pension,
but even at his age, still contributes R2,400 a month to a rapidly growing RAF. His medical aid
premium is a very competitive R2,530 per month, which covers himself and his wife. What is
his income tax liability for the tax year?

Notes

Income - Remuneration 288,000

Income - Interest 57,600

Gross income 345,600

Less: Exempt interest 1 (34,500)

Income 311,100

Less: RAF/retirement contribution 2 (R28,800)

Taxable income 282,300

Tax on R282,300 3 54,430

Less primary rebate (17,235)

Less secondary rebate (as 65 or older) (9,444)

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Less S6A tax credit 4 (8,736)

Less S6B tax credit 5 (1,384)

Tax payable 17,631

Notes:

1. As David is 65 or older, his interest exemption is the higher amount of R34,500.

2. R2,400 X 12 months = R28,800. His contribution limit would be 27.5% of taxable income
before this point – which is calculated as his remuneration plus non-exempt interest. This
makes his contribution limit 27.5% X R311,100, which equals R85,553. As his actual
contribution is less than this (and less than R350,000) the entire amount is allowed as a
deduction. (Remember that the deduction cannot be more than was actually contributed.)

3. R42,678 + 26% of amount above R237,100

R42,678 + (R282,300 – R237,100) * 26% = R42,678 + R11,752 = R54,430

4. R728 * 12 = R8,736

5. As David is 65 or older, and his medical aid contributions of R30,360 (2,530*12) exceed
three times his S6A tax credit which would be R26,208 (728*12*3), he gets one-third of the
excess as a S6B tax credit. R30,360 – R26,208 = R4,152. Then R4,152/3 = R1,384.

4.2 Example 2
Mr Smith is a 30-year-old junior manager, and he lives on his own. His gross income for the
year was R175,000, which included interest on a savings account of R10,000, and a dividend
of R5,000 that he received from some shares he owns. He contributed R16,000 to a pension
fund (calculated as a percentage of salary), and R2,000 to an RAF. His total medical aid
contributions were R18,000, and he had other medical expenses of R13,000.

Gross income 175,000

Less: Exempt income

Interest (10,000)

Dividends (5,000)

Income 160,000

Less: Retirement contributions (18,000)

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Subtotal 142,000

Add: Taxable Capitals Gains –

Taxable income 142,000

Tax on R142,000 25,560

Less primary rebate (17,235)

Less S6A tax credit (R364 X 12) (4,368)

Less S6B tax credit* (720)

Tax payable 3,237

Note:

Excess medical aid contributions of R528 (R18,000 – R17,472) plus other medical expenses of
R13,000. Limited to what exceeds R10,650 (7.5% of R142,000), and then divided by four. R528
+ R13,000 – R10,650 = R2,878 ÷ 4 = R720 (rounded to the nearest Rand).

5. eFiling
5.1 Introduction
SARS eFiling is a free service which allows taxpayers, tax practitioners and businesses to
register free of charge and submit returns, declarations, make payments and perform a
number of other interactions with SARS online. Taxpayers registered for eFiling can engage
with SARS online for the submission of returns, declarations and payments in respect of taxes,
duties, levies and contributions.

5.2 List of eFiling services

Currently, the following services are available:

• Pay-As-You-Earn (EMP201 return)

• Skills Development Levy (included on the EMP201 and EMP501 return)

• Value Added Tax (VAT201)

• Provisional Tax (IRP6)

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 • Secondary Tax on Companies (IT56)

• Personal Income Tax (ITR12)

• Trusts (IT12R)

• Advanced Tax Ruling (ATR)

• Change of Personal Details (IT77/RFC)

• Additional Payments

• Request for Tax Clearance Certificate

• Request for Tax Directive

• Transfer Duty

• Stamp Duty

• Security Transfer Tax (STT)

• Tax Practitioner Registration

• VAT Vendor Search

• Notification Tool

• Tax Calculators

• Complete history of eFiling usage

• Customs payments

• Air Passenger Tax payments

SARS intends to expand its service offering in future. Unemployment Insurance (UIF) filing
does not form part of the eFiling service and is done separately on [Link].

5.3 Registration for eFiling

Registration for eFiling may be done online at [Link].

In order to register, a taxpayer requires a tax registration number and identity number, which
means that the taxpayer must have registered for income tax previously.

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Registering for eFiling on SARS:

According to SARS (2016), it takes between 24 and 48 hours before returns are issued
electronically to the eFiling service.

A tax agent may register a client for eFiling or, if the client has already registered, access that
client's account and conduct all of the regular eFiling functions on the client's behalf. Once
the person has registered and been authenticated as an Agent with SARS eFiling, that person
can register clients as eFilers with SARS. The request for registration will be processed and
once the accuracy of information submitted is confirmed, eFiling will be activated for the
client.

On receipt of a request for registration, an agent will be required to provide proof of identity.
A SARS eFiling Access Number is issued via the SARS eFiling Call Centre once the agency or
agent has been authenticated. The agent will not be able to logon to eFiling without the Access
Number. The Access Number will, however, only be necessary on the first logon; thereafter
only the User ID and password will be required.

5.4 Benefits of eFiling

Aside from the convenience of being able to interact with SARS online, those using eFiling are
also given more time to make their submissions and payments – as a general rule, individual
eFilers have significantly later submission dates for a number of their returns. These dates will
be discussed in the upcoming module.

6. Conclusion
In this module, you have learnt how taxable income is determined by considering the concepts
of exempt income and deductions, and you worked through a comprehensive example, which
put the concepts you have learnt to practical use. You were also introduced to the SARS eFiling
system.

7. Bibliography
Deloitte. 2015. Quick Tax Guide 2015/2016: Driving progress. Available:
[Link] [2017,
July 17].

Department of Labour. 2016. uFiling. Available: [Link] [2016, March 16].

South African Revenue Services. 2016. eFiling. Available: [Link]

[2016, March 16].

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