DETERMINATION OF INCOME – REVISION NOTES

1. Gross Income – General Definition (s1)

 Total amount:
 Lategan case: Amount does not only include cash, but any
form of asset
 Butcher Bros case: Amount must have ascertainable money
value
 People Stores case: Amount includes any property with
monetary value
 In cash or otherwise
 Received by:
 Include in gross income at earlier of receipt or accrual
 Geldenhuys case: Received by means received “on his own
behalf and for own benefit”
 Pyott case: Deposits received placed in account out of the
taxpayers’ control is not included in gross income
 MP Finance Group case: Amount received with the
intention of retaining them for own benefit notwithstanding
that in law they are immediately repayable - receipts
 Accrued to:
 Mooi case: Accrued to means unconditionally entitled to
 People's Stores case: Entitlement even if not yet received
 Lategan case: Accrue to means entitled to, included in gross
income in the year of assessment it is accrued
 In favour of:
 Witwatersrand Association of Racing Clubs case: An
amount accrues to a taxpayer if the taxpayer has no legal
obligation to pay it over
 Resident: Taxed on worldwide income
 Non-resident: Taxed on SA source income
 During year of assessment
 Excluding capital receipts and accruals:
 Subjective tests:
o Visser case: “Tree vs Fruit” principle
o Stott case: Intention is the most dominant test, mere fact
that asset is sold at a profit does not indicate a change in
intention
o Nussbaum case: If neither purpose is dominant - dual
purpose is included in gross income
o Levy case: Mixed intentions - find dominant intention
o Natal Estates case: Change in intention – “Crossing the
Rubicon”. Taxpayer’s original intention is important, but it
may change
 Objective tests:
o Manner of acquisition
o Manner of disposal
o Period held
o Continuity
 o Occupation of taxpayer
o No change in ownership
o Legal nature of transaction
o Nature of asset
o Carrying on a trade: Scheme of profit-making
 Watchpoint: Burden of proof lies with taxpayer (s102 TAA)

2. Special Inclusions (s1, paras (a)–(n))

 Amounts included in gross income even if capital in
nature:
 Annuities: Fixed, repetitive, chargeable against someone
(para (a))
 Alimony/maintenance: Received by way of judicial order or
written notice (para (b))
 Services rendered: Amounts received in respect of services
rendered, employment or holding of an office (para (c))
 Restraint of trade: Included despite capital nature (para
(cA) & (cB))
 Termination of employment: Amount received due to loss
of employment (para (d))
 Retirement fund lump sums/withdrawals: Retirement,
death, retrenchment or resignation (para (e), (eA) & (eD))
 Lease premiums: Premium or similar consideration for the
right to lease an asset – in lessor’s gross income (para (g))
 Leasehold improvements: Value of improvements included
– in lessor’s gross income (para (h))
 Fringe benefits: Cash equivalent per 7th Schedule (para
(i))
 Dividends: Local & foreign (para (k))
 Watchpoint: Special inclusions override general definition.
Always test receipts against both

3. Exempt Income (s10, 10A–10C, 12T)

 Examinable exemptions:
 War pensions & awards for illness/disease (s10(1)(g),
(gA) & (gB))
 Foreign pensions (s10(1)(gC))
 Funeral benefits (s10(1)(gD))
 Employer insurance proceeds (s10(1)(gG), disability
policies)
 Death/disablement/unemployment payments (s10(1)
(gI))
 Interest exemption (SA source) (s10(1)(i)):
o R23 800 (<65 years), R34 500 (≥65 years)
o Only for natural persons, SA source
o Apportionment if <12-month year (e.g. emigration)
 Dividends exemption:
o Local dividends (s10(1)(k)): Exempt (except REIT
distributions)
 o Foreign dividends:
 Full exemption: If ≥10% shareholding (s10B(2)(a)) or
JSE listed shares or dual-listed (s10B(2)(d) & (e))
 Partial exemption ratios (s10B(3)): Natural
persons/trusts – 25/45 × foreign dividend. Companies -
7/27 × foreign dividend. Not if (s10B(5)) applies
 UIF benefits (s10(1)(mB))
 Uniform allowance (s10(1)(nA)):
o Must be condition of employment
o Must be special uniform clearly distinguishable from
other clothing
 Bursaries/scholarships (s10(1)(q) & (qA)):
o Bona fide bursaries exempt
o Bursary to employee: Exempt if employee will reimburse
employer if employee does not complete studies (s10(1)
(q)(i) & (qA)(i))
o Bursary to employee’s relative Not exempt if (s10(1)
(q)(ii) & (qA)(ii)):
 Remuneration proxy for the year exceeded R600k
 If remuneration proxy ≤R600k, exemption is capped at
R20k (Grade R-12 & NQF 1-4) and R60k (NQF 5-10). If
with disability R30k (Grade R-12 & NQF 1-4) and R90k
(NQF 5-10)
 Alimony/maintenance: Exempt if judicial order/written
agreement (s10(1)(u))
 Foreign employment income (s10(1)(o)(ii)): Up to
R1.25m exempt if >183 days abroad + continuous 60 days
 Tax-free investments (s12T):
o Interest, dividends, CGT exempt
o Contribution limits: R36k/year, R500k lifetime. Excess
taxed at 40%.
4. Timing Rules (s7B & s7E)
 Variable remuneration: Included when paid (bonus,
commission, overtime) (s7B)
 Interest from SARS: Included when received (s7E)

RESIDENTS AND NON-RESIDENTS – REVISION NOTES

1. Tax Basis
 Residents: Taxed on worldwide income (residence-based
system)
 Non-residents: Taxed only on South African source income
(source-based system)

2. Definition of Resident (s1)

 Two tests apply (natural persons):
 Ordinarily resident test (done first):
o Cohen case: Place a person naturally returns to from
wanderings
 o Kuttel case: “real home” test
 Physical presence test (only if not ordinarily resident):
o >91 days in current year
o >91 days in each of 5 preceding years
o >915 days in aggregate over 5 preceding years
o Then deemed resident from 1 March of that year
o Ceases if absent for continuous ≥330 days
o Not applied in year of emigration/immigration
 Companies: Resident if incorporated in SA or place of
effective management is in SA
 Watchpoint: Section 9H exit charge applies when ceasing
residence: Deemed disposal of assets at market value
(capital/revenue gain possible)

3. Non-Residents
 Source rules (s9):
 Dividends: Dividend paid by SA company (s9(2)(a))
 Interest: Interest paid by a SA resident or interest paid on
funds used in SA (s9(2)(b))
 Royalties: SA source if payer resident or IP used in SA (s9(2)
(c) & (d))
 Pensions/annuities: SA source pro rata for years of service
in SA (s9(2)(i))
 Capital gains: Immovable property in SA (s9(2)(j))
 Disposal of movable property in SA (s9(2)(k)):
o The person is a SA resident, and asset is effectively
connected with permanent establishment outside SA and
proceeds are not subject to foreign tax, or
o Person is a non-resident and the asset is effectively
connected with permanent establishment in SA
 Exchange differences (s9(2)(l))
 Case law residual rules (when s9 silent):
 Lever Bros case: The source of income is the “originating
cause”. Two questions must be answered:
o What is the originating cause of the income?
o Where is the originating cause located?
 Watchpoint: Section 9 overrides case law if conflict

4. Withholding Taxes
 Interest: 15% WHT on SA source interest received by a non-
resident (s50B):
 Deemed to have been paid at earlier of date of payment or
when it becomes due and payable (s50B(2))
 Dividends: 20% dividends tax (s64D), but local dividends
exempt under s10(1)(k)
5. Exemptions Relevant to Non-Residents
 Interest exemption (s10(1)(h))
  Natural person: Physically present >183 days in 12 months
before receipt and no permanent establishment in SA

CAPITAL GAINS TAX – REVISION NOTES

1. Background & Framework
 CGT is not a separate tax – it’s part of normal income tax via
s26A
 Governed by the Eighth Schedule to the Income Tax Act
 Valuation (effective) date: 01 October 2001
 Taxable capital gain included in taxable income; assessed
capital loss ring-fenced and carried forward

2. Key definitions:
 Asset (para (1)):
 Property of whatever nature:
o Movable or immovable
o Corporeal or incorporeal
o Excluding: Currency
o Including: Coins made mainly from gold or platinum
 Right/interest to such property
 Disposal (para (11) & (12)):
 Actual disposals (para (11)(1)):
o Sale
o Donation
o Scrapping, loss or destruction
o Expropriation, conversion, grant, cession or exchange
o Any alienation or transfer
o Forfeiture or termination
o Redemption, cancellation, waiver, expiry or abandonment
o Decrease in value of interest
 Deemed disposals (para (12) & s9H):
o Asset has changed its nature/status
o Deemed to have been disposed at market value and
immediately reacquired at the same market value
o At date of change, proceeds = market value (CGT
calculated on if asset is “leaving” the “CGT net”) and base
cost = market value
o CGT Net – see point 3 below
 Non-disposals: Will not give rise to CGT as they are regarded
as non-disposals (para (11)(2))
 Proceeds – amount received/accrued on disposal (para (35)
(1)):
 Includes:
o Amount of which a debt was reduced or discharged by the
creditor
o Compensation received by/accrued to a lessee from the
lessor for improvements effected to the property
  Reduction of proceeds (para (35)(3)):
o Any amount of the proceeds included/to be included in
gross income/taxable income before inclusion of any
taxable capital gain
o Refunds or reductions in consideration
o Reduction in ‘proceeds’ due to cancellation, termination,
prescription, waiver, etc. of the disposal agreement
 Deemed proceeds – asset is donated or sold between
connected persons and not at arm’s length (para (38)):
o The seller/donor is treated as if the asset was sold at
market value
o The buyer/donee is treated as if the asset was
purchased at market value
o Watchpoint: Person who paid donations tax includes an
amount per para (22) (donor) or para (21)(1)(c)(viii)
 Base cost (para (20)):
 Acquired before valuation date:
o Valuation date value, plus
o Para (20) expenditure
o Valuation date value:
 Market value at valuation date
 Time-apportionment base cost
 20% × (proceeds less para (20) costs)
 Acquired on or after valuation date (para (20)(1)):
o Acquisition or creation of an asset
o Valuation of the asset
o Buying and selling costs:
 Remuneration of a surveyor, valuer, auctioneer,
accountant, broker, agent, legal advisor for services
rendered
 Transfer costs
 Stamp duty, transfer duty or similar duty or tax
 Advertising costs
 Moving costs
 Installation costs, incl. foundation and supporting
structure costs
 Donations tax payable
 Portion of donations tax paid by donee
o Legal title/right to asset
o Improvements
 Excluded amounts (para (20)(2)):
o Borrowing costs, raising fees, bond registration/cancellation
costs
o Repairs and maintenance
o Protection and insurance
o Rates and taxes
 Reduction of base cost (para (20)(3)):
o Costs and expenses deducted for normal tax purposes
 o Expenses are recovered or recoverable or was paid by
another person
3. Persons Liable for CGT (para (2))
 Residents: Disposal of asset anywhere in the world
 Non-residents:
 Immovable property in SA:
o Includes equity shares held in a company if:
 ≥80% of the market value of the equity shares is
attributable to immovable property in SA, and
 The taxpayer together with any connected person holds
≥20% of the equity share
 Assets of a permanent establishment in SA
 Withholding tax: Applies if non-resident disposes of SA
immovable property > R2m (s35A)

Taxable Capital Gain

Total capital gains
Less: Total capital losses
Less: Annual exclusion (R40k, natural
persons only, R300k in case of death) (para
(5))
4. Capital Gain vs Taxable
Capital Gain = Aggregate capital gain/loss (para (6) & (7))
Capital Gain – each asset Less: Assessed capital loss brought forward
Proceeds from prior year

Less: Base cost = Net capital gain/Assessed capital loss (carry

over to next year) (para (8) & (9))
= Capital gain/loss (para (3)
& (4)) Multiply net capital gain by inclusion rate: 40%
(natural persons), 80% (non-natural
Less: Primary residence persons) (para (10))
exclusion (R2 million per
residence, natural = Taxable capital gain – include in taxable
persons only) income (s26A)

= Capital gain (para (3))

 5. Special Rules & Exclusions
 Primary residence exclusion (para (44) – (50)): R2m of
gain excluded.
 Applies to natural persons
 Ordinarily resides as main residence
 Used mainly for domestic purposes
 General rule
 Personal use assets (para 53): No gains/losses (except
immovable property, boats >10m, aircraft >450kg, financial
instruments).
 Other exclusions (paras 52–64B): retirement benefits,
insurance, gambling, donations to PBOs, small business
assets (R1.8m).
 Limitation of losses:
o Connected persons (para 39): losses disallowed, only
deductible against future gains with same person.
o Debt disposals (para 56): losses disallowed unless
taxed elsewhere.
5. Roll-overs & Transfers
 Involuntary disposals (para 65).
 Replacement assets (para 66).
 Transfers between spouses (s9HB): no CGT; transferee
assumes transferor’s base cost/date. ⚠️Not available if
transferee spouse is non-resident (except SA immovable
property).
6. Deemed Disposals
 Para 12: asset status changes (capital → trading stock,
resident → non-resident, personal use → non-personal use).
 s9H: emigration – deemed disposal at MV; tax year split into
two.
 s9HA: death – deemed disposal at MV (except assets to
spouse, retirement funds, insurance policies).
7. Anti-Avoidance & Special Provisions
 Value shifting arrangements (para 1).
 Clogged losses (connected persons).
  Unquantified amounts (para 39A, s24M): losses disregarded
until proceeds quantified.
 Debt concessions (para 12A): adjust base cost or recalc past
gains/losses.
8. Practical Examples
 Trading stock: proceeds/base cost excluded (nil CGT).
 Recoupment: part taxed as gross income, balance as capital
gain.
 Community of property (para 14): gains/losses split 50/50
unless excluded from joint estate.
9. Key Watchpoints for Exams
 Always aggregate gains/losses before applying inclusion
rate.
 Apply annual exclusion first, then inclusion rate.
 Distinguish capital vs revenue (tree vs fruit analogy).
 Primary residence: apportion if partly used for business.
 Emigration/death: deemed disposals at MV.
 Connected persons: beware of clogged losses.
 Case law:
o Stott – intention at acquisition.
o John Bell – mere decision to sell ≠ change of intention.
o NWK Ltd – commercial substance required.