SUGGESTED SOLUTION TO EXERCISE 3.

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1. True. See the definition of a ‘dividend’ in section 1(1) and the provisions of section 9(2)(a).
2. False. It is not from a South African source. See the definition of a ‘foreign dividend’ in section 1(1) and the provisions of
section 9(4)(a). But since a resident includes in his South African gross income his world-wide receipts or accruals, a foreign
dividend is included in his gross income.
3. True. Section 9(2)(b)(ii).
4. False. The place where the credit was made available is a case-law principle that is now largely irrelevant as a result of section 9(2)
and section 9(4), being added to the legislation.
5. True. Section 9(2)(b)(i).
6. True. Section 9(2)(d).
7. True. Section 9(2)(c).
8. False. The source of a rental is where the rent-producing property is situated. So rentals from a local property are from a South
African source, but not rentals from an offshore property. But since a resident includes in his South African gross income his world-
wide receipts or accruals, a foreign rental is included in his gross income.
9. False. An amount earned from services rendered to the South African government is from a South African source under the
provisions of section 9(2)(h)(i).
10. True. The application of section 9(2)(i) and its proviso result in only that portion of the pension that resulted from work carried out
in South Africa being from a South African source.

**2018**
 SUGGESTED SOLUTION TO EXERCISE 3.2
Page 1 of 2 pages

A natural person who is not ordinarily resident in South Africa will be a resident of the Republic if he was physically present in
South Africa for a period or periods exceeding
• 91 days in aggregate during the current year of assessment, and
• 91 days in aggregate during each of the five years of assessment preceding the current year of assessment, and
• 915 days in aggregate during the five preceding years of assessment.
First requirement
The person must be physically present in South Africa for more than 91 days in the current year of assessment.
Second requirement
The person must be physically present in South Africa for more than 91 days in each of the five previous years of assessment.
Third requirement
The person must be physically present in South Africa for more than 915 days in total during the five previous years of assessment.
Fourth requirement
The person must not be a person who was continuously absent from South Africa for a period of at least 330 days (see below in this
regard).
The so-called physical presence test deems a person to be a resident of the Republic if he was present in South Africa for a total
period of more than
• 91 days in the current, and
• 91 days in each of the preceding five years of assessment, and
• a total period of more than 915 days during the preceding five years of assessment.
The 91 days and the 915 days of physical presence need not be continuous. The 915 days applies to the preceding five years of
assessment and not to the current year of assessment. It will, therefore, be necessary to keep detailed records of a person’s physical
presence in South Africa.
Part days
A day will include a part of a day for the purposes of the determination of the days of physical presence in South Africa. This means
that the days of arrival in, and departure from, South Africa will count as days of being physically present in South Africa.
Continuous absence
A person who is a resident under the so-called physical presence test will be deemed not to be a resident if he is physically outside
South Africa for a continuous period of at least 330 full days immediately after the day on which he ceases to be physically present in
South Africa. He will be deemed not to have been a resident from the day on which he ceased to be physically present in South
Africa. This concession does not apply to a person who is ordinarily resident in South Africa, for example, a person who is absent
from his home in South Africa for, say, study purposes for a year.
The period of 330 days must be continuous. Because this concession applies only to a person who has met the physical presence
requirements, he must have been physically present in South Africa for more than 91 days in the current year of assessment, and
therefore it means that the period of 330 days will cover two years of assessment, since a total of 421 days (91 days plus 330 days) is
required,
• the first, being the year of assessment in which the person was last considered to be a resident under the so-called physical
presence test, and
• the second, being the following year of assessment.
The concession applies from the commencement of the 330-day period, so that the qualifying person will be a resident for part of the
first year of assessment and a non-resident for the remainder of the first year.
It is only after the 330-day period has been fulfilled that the person will be deemed not to be a resident.
Emigration year
The ‘physical presence’ test does not apply to a person who is ordinarily resident in South Africa in the year of assessment.
Therefore when a person emigrates from South Africa, because he would have been ordinarily resident in South Africa in the year of
assessment prior to his emigration, the ‘physical presence’ test cannot be applied in the year of assessment of emigration.
The person will therefore
• be a resident of the Republic up to the time of his emigration, and
• not be a resident of the Republic from the day he emigrates.
Applying the above provisions to the taxpayers listed in this case study, the following results are achieved:

**2018** /continued on page 2

 SUGGESTED SOLUTIONS TO EXERCISE 3.2
Page 2 of 2 pages
Zenzil Amber
Zenzil Amber was physically present in South Africa for
• more than 91 days in the 2018 year of assessment,
• more than 91 days in the 2017 year of assessment he was physically present in South Africa for 100 days,
• for more than 91 days in the 2016 year of assessment he was physically present in South Africa for 345 days, and
• in the 2015, 2014 and 2013 years of assessment he was physically present in South Africa for 365 days each year.
And in total in the five previous years of assessment (the 2017, 2016, 2015, 2014 and 2013 years of assessment) he was physically
present in South Africa for more than 915 days (he was physically present in South Africa for a total of 1 540 days during these five
years of assessment). Zenzil Amber was not also continuously absent from South Africa for a period of at least 330 days.
For the 2018 year of assessment, Zenzil Amber is therefore a resident of the Republic.
Amos Black
Since Amos Black was not physically present in South Africa for more than 91 days in the 2018 year of assessment he is not a
resident of the Republic.
Boris Charcoal
Since Boris Charcoal was not physically present in South Africa for more than 91 days in the 2017 year of assessment he is not a
resident of the Republic.
Clinton Diamond
Since Clinton Diamond was not physically present in South Africa for more than 91 days in the 2017 year of assessment he is not a
resident of the Republic.
Dexter Emerald
Dexter Emerald emigrated from South Africa during the 2018 year of assessment. He was ordinarily resident in South Africa for the
first 153 days of the 2018 year of assessment. He is therefore a resident of the Republic for 153 days in the 2018 year of assessment.
He is a non-resident for the remaining 212 days in the 2018 year of assessment.
Edna Fern
Since Edna Fern was not physically present in South Africa for more than 91 days in the 2018 year of assessment she is not a
resident of the Republic.
Felicity Green
Felicity Green was physically present in South Africa for
• more than 91 days in the 2018 year of assessment,
• more than 91 days in the 2017 year of assessment she was physically present in South Africa for 92 days,
• more than 91 days in the 2016 year of assessment she was physically present in South Africa for 92 days, and
• in 2015, 2014 and 2013 years of assessment she was physically present in South Africa for 92 days in each year.
But in total in the five previous years of assessment (the 2017, 2016, 2015, 2014 and 2013 years of assessment) she was not
physically present in South Africa for more than 915 days. She was physically present in South Africa for a total of only 460 days
during these five years of assessment.
For the 2018 year of assessment, Felicity Green is therefore not a resident of the Republic.
Grace Heliotrope
Grace Heliotrope was physically present in South Africa for
• more than 91 days in the 2018 year of assessment,
• more than 91 days in the 2017 year of assessment she was physically present in South Africa for 182 days,
• more than 91 days in the 2016 year of assessment she was physically present in South Africa for 183 days, and
• in the 2015, 2014, 2013 years of assessment she was physically present in South Africa for 182 days in each year.
But in total in the five previous years of assessment (the 2017, 2016, 2015, 2014 and 2013 years of assessment) she was not
physically present in South Africa for more than 915 days. She was physically present in South Africa for a total of 911 days during
these five years of assessment.
For the 2018 year of assessment, Grace Heliotrope is therefore not a resident of the Republic.
Hillary Indigo
Since Mrs Indigo was not physically present in South Africa for more than 91 days in 2017 and 2014 years of assessment she is not a
resident of the Republic.
Iris Jade
Since Iris Jade was not physically present in South Africa for more than 91 days in the 2016 year of assessment she is not a resident
of the Republic.
**2018**
 SUGGESTED SOLUTION TO EXERCISE 3.3
Page 1 of 2 pages
Zoe Young
Suggested Solution to Part 1
Residence for the 2017 year of assessment
First requirement
Number of days, in aggregate, that Zoe Young was physically present in South Africa during the 2017 year of assessment. This
amounts to 214 days (92 days plus 92 days plus 30 days) which is more than the required 91 days.
Second requirement
Number of days, in aggregate, that Zoe Young was physically present in South Africa during each of the five years of assessment
preceding the 2017 year of assessment. The days for each year are as follows:
2012 year of assessment: 246 days (more than 91 days),
2013 year of assessment: 184 days (more than 91 days)
2014 year of assessment: 180 days (more than 91 days)
2015 year of assessment: 93 days (more than 91 days), and
2016 year of assessment: 244 days (more than 91 days).
Third requirement
Number of days in aggregate that Zoe Young was physically present in South Africa during the five years of assessment preceding
the 2017 year of assessment. This amounts to 947 days (246 days plus 184 days plus 180 days plus 93 days plus 244 days) which is
more than the required 915 days.
Since all five requirements have been met, Zoe Young is a resident of the Republic in the 2017 year of assessment, even though she
is not ordinarily resident in South Africa.
Suggested Solution to Part 2
Date from which became a resident
Due to the physical presence test, Zoe Young became a resident after spending 91 days in South Africa in the 2017 year of
assessment, that is on 31 May 2016. But she is deemed to be a resident from 1 March 2016 and must therefore include in her gross
income on her world-wide receipts and accruals for the 2017 year of assessment (1 March 2016 to 28 February 2017 (but see
below)).
Suggested Solution to Part 3
Date from which ceased to be a resident
Zoe Young was physically outside South Africa for a continuous period of 335 days (from 1 December 2016 to 31 October 2017)
which is more than 330 full days.
After the continuous period of 330 full days that Zoe Young was physically outside South Africa, she is deemed not to be a resident
from the beginning of the 330-day period, that is 1 December 2016, the day following the day of her departure.
If an assessment has been issued to Zoe Young to include her world-wide receipts and accruals in her gross income for the period
31 May 2016 to 28 February 2017 (see above), a reduced assessment (under section 93 of the Tax Administration Act) must be issued
so as to exclude amounts that accrued to her on or after 1 December 2016 that are not from a source within South Africa. The reduced
assessment can be issued only after proof of the actual period of physical absence has been obtained. Reduced assessments are subject
to the three-year prescription period contained in section 190 of the Tax Administration Act. Her 2017 assessment will therefore
reflect the following:
• Taxable world-wide receipts and accruals for the period 1 March 2016 to 30 November 2016 during which period she was a resident,
and
• taxable income from a source within South Africa for the period from 1 December 2016 to 28 February 2017 during which period
she was not a resident. She is deemed to be a resident on 1 March 2016 and she ceased to be a resident on 1 December 2016 (see
above).
Suggested Solution to Part 4
Residence for the 2018 year of assessment
First requirement
Number of days, in aggregate, that Zoe Young was physically present in South Africa during the 2018 year of assessment. This
amounts to 30 days which is less than the required 91 days.
Other requirements
Due to the fact that Zoe Young was physically present in South Africa for less than 91 days during the 2018 year of assessment, she
does not comply with the first requirement. It is therefore unnecessary to consider the second and third requirements.
Zoe Young is therefore not a resident in the 2018 year of assessment, in which instance she is subject to normal tax in South Africa on
only her taxable income from a source within South Africa.
**2018** /continued on page 2
 SUGGESTED SOLUTION TO EXERCISE 3.3
Page 2 of 2 pages
Suggested Solution to Part 5
Residence for the 2018 year of assessment
First requirement
Number of days, in aggregate, that Zoe Young was physically present in South Africa during the 2018 year of assessment. This
amounts to 120 days (more than 91 days).
Second requirement
Number of days, in aggregate, that Zoe Young was physically present in South Africa during each of the five years of assessment
preceding the 2018 year of assessment.
2013 year of assessment: 184 days (more than 91 days)
2014 year of assessment: 180 days (more than 91 days)
2015 year of assessment: 92 days (more than 91 days),
2016 year of assessment: 244 days (more than 91 days), and
2017 year of assessment: 214 days (more than 91 days).
Third requirement
Number of days, in aggregate, that Zoe Young was physically present in South Africa during the five years of assessment preceding
the 2018 year of assessment. This amounts to 915 days (184 days plus 180 days plus 93 days plus 244 days plus 214 days) which does
not exceed the required 915 days. The definition of a ‘resident’ requires, amongst other things, for the person to be physically present
in South Africa
‘for a period or periods exceeding 915 days in aggregate during those five proceeding years of assessment’.
(Emphasis added.))
Since all three requirements are not met, Zoe Young is not a resident in the 2018 year of assessment.

**2018**
 SUGGESTED SOLUTION TO EXERCISE 3.4
Page 1 of 4 pages
Joe Kerr
Suggested Solution to Part 1
The term ‘ordinarily resident’ is not defined in the Income Tax Act. Its meaning has, however, been examined in numerous cases.
The factors a court considers when deciding on whether a taxpayer is ordinarily resident include the following:
• The degree of continuity.
• The mode of life of the taxpayer.
• The taxpayer’s ‘physical presence’ – although this is not essential.
• His intention of being in a country. In this regard the courts have held that his ‘domicile’ (in the legal sense) is irrelevant, but his
intention of being in a country is.
• The facts surrounding the matter.
Two cases from the Appellate Division of the Supreme Court (now the Supreme Court of Appeal) dealt with the meaning of the term
‘ordinarily resident’. These cases were Cohen v CIR (1946 AD 174, 13 SATC 362) and CIR v Kuttel (1992 (3) SA 242 (A), 54
SATC 298).
Cohen
Cohen was one of the two directors of OK Bazaars (1929) Ltd. Because it was difficult to obtain merchandise in South Africa during
the second world war, he on behalf of OK Bazaars (1929) Ltd, proceeded abroad to act as its buyer. He was accompanied by his
wife, three children and a nurse. He established himself with his wife and family in an apartment in New York from October 1940.
Although he had originally planned to be outside South Africa for only nine months, this period was extended by a year, and up to
30 June 1942, neither he nor his family had returned to South Africa. In 1939 he had leased a flat in Johannesburg for five years. He
had furnished it. He sublet this now ‘furnished’ flat while he was in New York.
While in New York Cohen earned dividends from South African public companies. He believed that these dividends were exempt
from normal tax in South Africa because he was not ‘ordinarily resident’ and not ‘carrying on business’ in South Africa in the years
of assessment in dispute.
Schreiner JA, who delivered the judgment of the Appellate Division, said the following (at SATC 371):
‘If, though a man may be “resident” in more than one country at a time, he can only be “ordinarily resident” in one, it would be
natural to interpret “ordinarily” by reference to the country of his most fixed or settled residence. But his ordinarily residence
would be the country to which he would naturally and as a matter of course return from his wanderings, as contrasted with other
lands it might be called his usual or principal residence and would be described more aptly than other countries as his real home.
If this suggested meaning were given to “ordinarily” it would not, I think, be logically permissible to hold that a person could be
“ordinarily resident” in more than one country at the same time.’
A person can be ordinarily resident in a country from which he was absent throughout the year of assessment, and the question
whether a person is ‘ordinarily resident’ in South Africa does not depend solely upon his actions during that particular year. An
investigation of his lifestyle before, or even after, the year of assessment may be necessary to reach a conclusion.
The Appellate Division held that the question whether an individual was resident or ordinarily resident in a particular area for the
purposes of the Income Tax Act was one of fact. There was evidence to find that Cohen had not proved that he was not ordinarily
resident in South Africa. It also found that the question whether an individual was in a year of assessment ordinarily resident in South
Africa, or elsewhere, was not to be determined solely by his actions during that particular year of assessment. His conditions of
ordinarily residence during that particular year could be determined by evidence as to his mode of life outside the year of assessment
under consideration. Finally, it found that physical absence during the whole of the year of assessment was not decisive of the
question of ‘ordinary residence’.
It was unnecessary for the Appellate Division to decide in Cohen’s case whether a person could be ordinarily resident in more than
one country at the same time.
Kuttel
Kuttel had emigrated from South Africa to America in July 1983. Prior to emigrating he had sold some of his assets and invested the
proceeds in an interest-bearing security. In addition to this investment, he held shares in the company that owned the private
residence where he lived when he was resident in South Africa. This residence was not let on his departure but was kept vacant to
provide him with accommodation when he returned to South Africa.
Kuttel did not give up his directorship of a private company when he left South Africa. Between July 1983 and 28 February 1986 he
returned to South Africa on 10 occasions, each for a period of less than two months. On two of these occasions he attended directors’
meetings. On all 10 occasions he stayed in his former private residence.
The main purposes of Kuttel’s visits to South Africa were domestic matters, including,
• the schooling of his children,
• the building of a private yacht,
• competing in a yacht race in South Africa,
• attending his late brother’s funeral, and
• supervising his various investments and business interests in South Africa.

**2018** /continued on page 2

 SUGGESTED SOLUTION TO EXERCISE 3.4
Page 2 of 4 pages
The Commissioner, when assessing him for South African normal taxation, had not granted Kuttel the section 10(1)(h) exemption
from normal tax for his interest earned on the interest-bearing security and the section 10(1)(k)(i) exemption from normal tax for his
dividend receipts and accruals. The Commissioner believed he was both ‘ordinarily resident’ in South Africa and ‘carrying on
business’ in South Africa.
The lower court, being the tax court, reported as ITC 1501 ((1989) 53 SATC 314) found that
• he was ordinarily resident in America and not in South Africa, and
• the mere fact that he was a director of a company did not mean that this directorship constituted the carrying on of a business.
He was therefore neither ordinarily resident nor carrying on business in South Africa. This meant that the exemption provisions of
section 10(1)(h) and section 10(1)(k) were available to him. Accordingly, the interest from the interest-bearing security and the
dividends earned by him were exempt from normal tax in South Africa.
The Commissioner appealed against this decision to the Appellate Division, but only on the question of the taxpayer being
‘ordinarily resident’ in South Africa.
The Appellate Division agreed with the judgment given in ITC 1501 finding that Kuttel was not ordinarily resident in South Africa.
In the Appellate Division, Goldstone JA, giving the unanimous judgment, held that (at SATC 306)
‘a person is “ordinarily resident” where he has his usual or principal residence, that is, what may be described as his real home’.
Joe Kerr has four residences, three in South Africa (one each in Cape Town, Durban and Johannesburg) and the house on the golf
estate outside South Africa. His real home is the house on the golf estate outside South Africa. Therefore despite owning and
occupying, from time to time, three residences in South Africa (the three townhouses), he is not ordinarily resident in South Africa.
Suggested Solution to Part 2
Physical presence
A natural person will be a resident of the Republic if he was physically present in South Africa for a period or periods exceeding
• 91 days in aggregate during the current year of assessment, and
• 91 days in aggregate during each of the five years of assessment preceding the current year of assessment, and
• 915 days in aggregate during the five preceding years of assessment.
First requirement
The person must be physically present in South Africa for more than 91 days in the current year of assessment.
Second requirement
The person must be physically present in South Africa for more than 91 days in each of the five previous years of assessment.
Third requirement
The person must be physically present in South Africa for more than 915 days in total during the five previous years of assessment.
Fourth requirement
The person must not be a person who was continuously absent from South Africa for a period of at least 330 days (see below in this
regard).
The so-called physical presence test deems a person to be a resident if he was present in South Africa for a total period of more than
• 91 days in the current, and
• 91 days in each of the preceding five years of assessment, and
• a total period of more than 915 days during the preceding five years of assessment.
The 91 days and the 915 days of physical presence need not be continuous. The 915-day period applies to the preceding five years of
assessment and not to the current year of assessment. It is, therefore, necessary to keep detailed records of a person’s physical
presence in South Africa.
Part days
A day will include a part of a day for the purposes of the determination of the days of physical presence in South Africa. This means
that the days of arrival in, and departure from, South Africa will count as days of being physically present in South Africa.
Continuous absence
A person who is a resident under the so-called physical presence test will be deemed not to be a resident if he is physically outside
South Africa for a continuous period of at least 330 full days immediately after the day on which he ceases to be physically present in
South Africa. He will be deemed not to have been a resident from the day on which he ceased to be physically present in South
Africa.
The period of 330 days must be continuous. Because this concession applies only to a person who has met the physical presence test,
he must have been physically present in South Africa for more than 91 days in the current year of assessment. It follows that the
period of 330 days will cover two years of assessment, the
**2018** /continued on page 3
 SUGGESTED SOLUTION TO EXERCISE 3.4
Page 3 of 4 pages
• first, being the year of assessment when the person was last considered to be a resident under the physical presence test, and the
• second, being the following year of assessment.
The concession applies from the commencement of the 330-day period, so that the qualifying person will be a resident for part of the
first year of assessment and a non-resident for the remainder of the first year.
It is only after the 330-day period has been fulfilled that the person will be deemed not to be a resident.
Joe Kerr
Joe Kerr is physically present in South Africa for more than 91 days in the 2018 year of assessment.
Joe Kerr was
• physically present in South Africa for more than 91 days in the 2017 year of assessment (he was physically present in South
Africa for 183 days),
• in the 2016 year of assessment he was physically present in South Africa for 182 days,
• in the 2015 year of assessment he was physically present in South Africa for 182 days,
• in the 2014 year of assessment he was physically present in South Africa for 182 days, and
• in the 2013 year of assessment he was physically present in South Africa for 183 days.
But in total in the five previous years of assessment (the 2017, 2016, 2015, 2014 and 2013 years of assessment) Joe Kerr was not
physically present in South Africa for more than 915 days. He was physically present in South Africa for a total of 912 days during
these five years of assessment.
For the 2018 year of assessment, Joe Kerr is therefore not a resident of the Republic.
Suggested Solution to Part 3
Hobby into business
From the information provided, it is likely that if Joe Kerr wished to do so, he may be able to satisfy the Commissioner that he is
carrying on business in South Africa.
If Joe Kerr did so then, as correctly pointed out by his friend, the loss he suffered from this business would be deductible in the
determination of his taxable income. It would then also reduce his South African normal tax liability.
But then the section 10(1)(h) exemption for Joe Kerr’s interest from a South African source may be unavailable to him if he is carrying
on this business through a permanent establishment in South Africa and the interest he earns is effectively connected to his permanent
establishment in South Africa. He would still, however, qualify for the so-called basic interest exemption for normal tax for the first
R23 800 of not otherwise exempt interest (under section 10(1)(i)).
A ‘permanent establishment’ is defined in the OECD Model Treaty in article 5(1) as
‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’.
A permanent establishment includes a number of specific entities. These specific entities are listed in article 5(2). They are as
follows:
• A place of management.
• A branch.
• An office.
• A factory.
• A workshop.
• A mine, an oil or gas well, and a quarry or place of extraction of natural resources.

Under article 5(3), a building site or construction or installation project will also be a permanent establishment, but only if it lasts for
more than 12 months.

Certain ‘exclusions’ from the definition of a ‘permanent establishment’ are set out in article 5(4).
It is possible to conduct business in a state without establishing either a branch or an office in that state. This situation is covered in
article 5(5). It provides that, notwithstanding the definition of a ‘permanent establishment’ and its so-called specific inclusions, when
an enterprise of one state carries on business in the other state through an agent, other than an agent of independent status acting in
the ordinary course of his business, who has, and habitually exercises, in that other state a power to contract on behalf of his
principal, it is deemed to have a permanent establishment in that other state.

Article 5(6) provides that an enterprise is not deemed to have a permanent establishment in a contracting state merely because it
carries on business in that state through a broker, general commission agent or any other agent of an independent status, provided
that this person is acting in the ordinary course of his ‘own’ business.
Despite the wide nature of the definition of a ‘permanent establishment’, it is unlikely that a professional golfer who plays on a number
of golf courses in a country, may be carrying on business in that country, but will not be carrying on this business through a permanent
establishment in that country. Although the position is unclear, it is unnecessary to decide this issue.
**2018** /continued on page 4
 SUGGESTED SOLUTION TO EXERCISE 3.4
Page 4 of 4 pages
Joe Kerr earns his interest from interest-bearing securities offered by South African financial institutions. He does not earn his interest
from a permanent establishment in South Africa. This means that the section 10(1)(h) exemption from normal tax for the interest he
earns is still available to him. His South African taxable income is then as follows:
‘Local’ dividends (exempt from normal tax under section 10(1)(k)(i)) -
Local interest 223 800
Less exemption from normal tax (section 10(1)(h)) 223 800 -
Net rentals 960 000
Taxable income 960 000
Joe Kerr’s taxable income will then be reduced if his business loss is then deducted from his income in the determination of his taxable
income.
It is a more tax-efficient for Joe Kerr to play golf as a ‘business’ with a deduction in the determination of his taxable income for the loss
he has suffered.

**2018**
 SUGGESTED SOLUTION TO EXERCISE 3.5
Page 1 of 2 pages
Hamba Phesheya
A natural person will be a resident of the Republic if he was physically present in South Africa for a period or periods exceeding
• 91 days in aggregate during the current year of assessment, and
• 91 days in aggregate during each of the five years of assessment preceding the current year of assessment, and
• 915 days in aggregate during the five preceding years of assessment.
First requirement
The person must be physically present in South Africa for more than 91 days in the current year of assessment.
Second requirement
The person must be physically present in South Africa for more than 91 days in each of the five previous years of assessment.
Third requirement
The person must be physically present in South Africa for more than 915 days in total during the five previous years of assessment.
Fourth requirement
The person must not be a person who was continuously absent from South Africa for a period of at least 330 days (see below in this
regard).
Overall requirements
The so-called physical presence test deems a person to be a resident if he was present in South Africa for a total period of more than
• 91 days in the current, and
• 91 days in each of the preceding five years of assessment, and
• a total period of more than 915 days during the preceding five years of assessment.
The 91 days and the 915 days of physical presence need not be continuous. The 915-day period applies to the preceding five years of
assessment and not to the current year of assessment. It will, therefore, be necessary for a person to keep detailed records of physical
presence in South Africa.
Part days
A day will include a part of a day for the purposes of the determination of the days of physical presence in South Africa. This means
that the days of arrival in and departure from South Africa will count as days of being physically present in South Africa.
Continuous absence
A person who is a resident under the so-called physical presence test will be deemed not to be a resident if he is physically outside
South Africa for a continuous period of at least 330 full days immediately after the day on which he ceases to be physically present in
South Africa. He will be deemed not to have been a resident from the day on which he ceased to be physically present in South
Africa.
The period of 330 days must be continuous. Because this concession applies only to a person who has met the physical presence test,
he must have been physically present in South Africa for more than 91 days in the current year of assessment. It follows that the
period of 330 days will cover two years of assessment, since a total period of 421 days (91 days plus 330 days) is required,
• the first, being the year of assessment in which the person was last considered to be a resident under the physical presence test,
and
• the second, being the following year of assessment.
The concession applies from the commencement of the 330-day period, so that the qualifying person will be a resident for part of the first
year of assessment and a non-resident for the remainder of the first year.
It is only after the 330-day period has been fulfilled that the person will be deemed not to be a resident.
The position of Hamba Phesheya is as follows:
• In the 2018 year of assessment Hamba Phesheya will be in South Africa for 240 days if he agrees to work on the contract in
South Africa.
• In the 2017 year of assessment he was in South Africa for 245 days (1 March 2016 to 31 October 2016).
• In the 2016 year of assessment he was in South Africa for 366 days (1 March 2015 to 29 February 2016).
• In the 2015 year of assessment he was in South Africa for 365 days (1 March 2014 to 28 February 2015).
• In the 2014 year of assessment he was in South Africa for 365 days (1 March 2013 to 28 February 2014).
• In the 2013 year of assessment he was in South Africa for 305 days (365 days – 60 days).
• In the previous five years of assessment Hamba Phesheya was in South Africa for a total of 1 646 (245 + 366 + 365 + 365 +
305) days.

**2018** /continued on page 2

 SUGGESTED SOLUTION TO EXERCISE 3.5
Page 2 of 2 pages
If Hamba Phesheya comes to South Africa to work on the contract in South Africa he will be physically present in South Africa for more
than 91 days in the 2018 year of assessment and he was physically present in South Africa for more than 915 days during the five previous
years of assessment.
Therefore if Hamba Phesheya spends more than 91 days in South Africa in the 2018 (current) year of assessment he will be a resident of
the Republic as defined.
Ntokazi Swahla
Ntokazi Swahla is a resident of the Republic since she is ordinarily resident in South Africa. Her parent’s home in South Africa is
still her home.
Ntokazi Swahla gross income therefore comprises her world-wide receipts and accruals. Since she is not rendering services outside
South Africa for or on behalf of an employer, she will not enjoy the section 10(1)(o)(ii) exemption from normal tax.
Ntokazi Swahla net winnings from playing basketball on the American circuit will be subject to South African normal tax.

**2018**
 SUGGESTED SOLUTION TO EXERCISE 3.6
1 Page only
Galo Yephuka
2017 year of assessment
First requirement
Number of days, in aggregate, that Galo Yephuka was physically present in South Africa during the 2017 year of assessment. This
amounts to 111 days (more than 91 days).
Second requirement
Number of days, in aggregate, that Galo Yephuka was physically present in South Africa during each of the five years of assessment
preceding the 2017 (current) year of assessment. The days for each year are as follows:
2012 year of assessment – 245 days (more than 91 days),
2013 year of assessment – 183 days (more than 91 days),
2014 year of assessment – 182 days (more than 91 days),
2015 year of assessment – 196 days (more than 91 days), and
2016 year of assessment – 243 days (more than 91 days).
Third requirement
Number of days in aggregate that Galo Yephuka was physically present in South Africa during the five preceding years of
assessment. This amounts to 1 049 days (245 + 183 + 182 + 196 + 243), being more than the required 915 days. Since all five
requirements have been met, he is a resident of the Republic, notwithstanding the fact that he is not ordinarily resident in South
Africa.
Date deemed to be a resident
Because Galo Yephuka is a resident due to the so-called physical presence test, he is deemed to be a resident as from the first day of
the 2017 year of assessment, that is from 1 March 2016. He is therefore subject to normal tax on his world-wide receipts and accruals
(excluding certain amounts that are exempt from normal tax) for the entire 2017 year of assessment.
Date ceased being a resident
Galo Yephuka is physically outside South Africa for a continuous period of 335 days (from 1 December 2016 to 31 October 2017),
which is more than 330 entire days.
After the continuous period of 330 full days during which Galo Yephuka was physically outside South Africa, he is deemed not to be
a resident from the beginning of the 330-day period, that is 1 December 2016, the day following the day of his departure, namely,
30 November 2016.
If an assessment has been issued to Galo Yephuka to include his world-wide receipts and accruals in his South African gross income
for the entire year, a reduced assessment (under section 93 of the Tax Administration Act) must be issued so as to exclude amounts
accrued on or after 1 December 2016 that are not from a source within South Africa. The reduced assessment can be issued only after
proof of the actual period of physical absence has been obtained. Reduced assessments are subject to the three-year prescription
period contained in section 190 of the Tax Administration Act. His 2017 assessment will therefore reflect the following:
• Taxable world-wide receipts and accruals for the period 1 March 2016 to 30 November 2016 during which period he was a
resident, and
• taxable income from a source within South Africa for the period 1 December 2016 to 28 February 2017 during which period he
was not a resident. He ceased to be a resident on 1 December 2016 (see above).
2018 year of assessment
First requirement
Number of days, in aggregate, that Galo Yephuka was physically present in South Africa during the 2018 year of assessment. This
amounts to 30 days, which is less than the required 91 days.
Other requirements
Due to the fact that Galo Yephuka was physically present in South Africa for less than 91 days during the 2018 year of assessment,
he does not comply with the first requirement. It is, therefore, unnecessary to consider the second and third requirements.
Galo Yephuka is therefore not a resident, so that he is subject to normal tax in South Africa on only his taxable income from a source
within South Africa.

**2018**
 SUGGESTED SOLUTION TO EXERCISE 3.7
Page 1 of 5 pages
Suggested Solution to E-Mail 1
A stay of nine months, say 270 days, in the current year of assessment will not cause your parents to be residents under the so-called
physical presence test.
Being non-residents your parents will be subject to normal tax in South Africa only if the source of their receipts and accruals is in
South Africa. Since the investments were made in South Africa out of their blocked funds in South Africa the ‘local’ dividends,
interest and rentals earned will be included in their South African gross income. But then because the dividends earned are ‘local’
dividends they are then exempt from normal tax from South African normal tax (under section 10(1)(k)(i)). No exemption from
normal tax is available for the rentals earned, but expenses incurred in producing the rentals will be deductible in the determination
of taxable income. In other words, only the net rentals earned will be subject to South African normal tax. The interest earned may be
exempt from normal tax under section 10(1)(h). But to enjoy this exemption from normal tax certain conditions must be satisfied.
One of these conditions is that the taxpayer must not be
‘physically present in the Republic for a period exceeding 183 days in aggregate during the 12-month period preceding the date on
which the interest is received [by] of accrues [to] that person’.
Should your parents come to South Africa to ‘baby-sit’ your children for nine months during the current year of assessment, some of
the interest that they earn from a South African source will not be exempt from normal tax from normal tax in South Africa under
section 10(1)(h). Interest that is received or that accrues to them after they have been in South Africa for 183 days will not be exempt
from normal tax under section 10(1)(h). For example, if they arrive in South Africa on 1 March 2018 and leave on 30 November
2018 and the first monthly interest accrual occurs on 31 March 2018, then the accruals of interest from 31 August 2018 to 31 May
2019 inclusive will not be exempt from normal tax. For the interest accrual on 30 June 2019, the 12-month period preceding that date
of accrual would be from 29 June 2018 to 29 June 2019. During this 12-month period they would have been in South Africa from
29 June 2018 to 30 November 2018 which is a 153-day period. The interest that accrues to them from 30 June 2019 will then again
be exempt from normal tax in South Africa. A limited exemption from normal tax will, however, be available to both of them under
section 10(1)(i). It exempts from normal tax the first R34 500 (because they have attained the age of 65 years) of not otherwise
exempt from normal tax interest.
To summarise, the intended visit by your parents will have adverse South Africa normal tax consequences in that some of their
previously ‘exempt’ from normal tax interest will to the extent that it exceeds R34 500, become ‘taxable’ interest.
Suggested Solution to E-Mail 2
A stay of four months, say 120 days, in the current year of assessment will not cause your father to be resident under the physical
presence test.
Being a non-resident your father will be subject to normal tax in South Africa only if the source of his receipts and accruals is in
South Africa. Since his investments were made in South Africa out of his blocked funds, the local dividends, local interest and
rentals earned will be included in his South African gross income. But then because the dividends earned are local dividends they are
exempt from normal tax from South African normal tax (under section 10(1)(k)(i)). No exemption from normal tax is available for
rentals earned, but expenses incurred in producing the rentals will be deductible in the determination of his taxable income. In other
words, only the net rentals earned will be subject to normal tax.
The local interest earned may be exempt from normal tax under section 10(1)(h). But to enjoy this exemption from normal tax certain
conditions must be satisfied. One of these conditions is that the interest he earns must not be effectively connected to a permanent
establishment of his in South Africa.
If your father comes to South Africa to help you in your business and you pay him a salary for the work he does he will be ‘trading’
in South Africa. But your business will not be a permanent establishment of his in South Africa. He will then still be able enjoy the
section 10(1)(h) exemption from normal tax for the local interest that he earns from a South African source.
But if you and your father enter into a joint venture for the four-month period when he helps you in your business, he will have a
South African permanent establishment. And then since the local interest he earns is then effectively connected to his permanent
establishment South Africa, the section 10(1)(h) exemption from normal tax will then be unavailable to him in the current year of
assessment. A limited exemption, namely, the basic local interest exemption from normal tax is, however, still available to him. After
enjoying this ‘basic exemption’ he will then be subject to South African normal tax on the balance of the local interest he earns from
a South African source in the current year of assessment.
You should therefore employ your father as a salaried employee during the four-month period when he helps you with your business.
Suggested Solution to E-Mail 3
Your son is a resident of the Republic. His South African gross income therefore comprises his world-wide receipts and accruals.
The salary he earns while working for the United Cricket Board outside South Africa (in New Zealand, Australia and England) will
be included in his South African gross income. The salary may, however, be exempt from normal tax from normal tax under
section 10(1)(o)(ii). But to qualify for this exemption from normal tax,
• he must render his services outside South Africa,
• these services must be for or on behalf of an employer,
• he must be outside South Africa for a period or periods exceeding 183 full days in aggregate during a 12-month period,
• he must be outside South Africa for a continuous period exceeding 60 full days during this 12-month period, and
• he must not earn remuneration as contemplated in section 9(2)(h).
**2018** /continued on page 2
 SUGGESTED SOLUTION TO EXERCISE 3.7
Page 2 of 5 pages
Your son fulfils all the above conditions and therefore the salary he earns while rendering services for the United Cricket Board in
New Zealand, Australia and England will be exempt from South African normal tax.
Suggested Solution to E-Mail 4
Your son is a resident of the Republic. His South African gross income therefore comprises his world-wide receipts and accruals.
The salary he earns while working for the South African Rugby Board outside South Africa (in Italy, France, England, Wales,
Scotland and Ireland) will be included in his South African gross income. The salary may, however, be exempt from normal tax from
normal tax under section 10(1)(o)(ii). But to qualify for this exemption from normal tax,
• he must render his services outside South Africa,
• these services must be for or on behalf of an employer,
• he must be outside South Africa for a period or periods exceeding 183 full days in aggregate during a 12-month period,
• he must be outside South Africa for a continuous period exceeding 60 full days during this 12-month period, and
• he must not earn remuneration as contemplated in section 9(2)(h).
Your son will not enjoy this exemption from normal tax since he will not be outside South Africa for a period or periods exceeding
183 full days in aggregate during a 12-month period. The salary that he earns while working outside South Africa during this nine-week
period will therefore be subject to South African normal tax.
Suggested Solution to E-Mail 5
Your daughter is a resident of the Republic because she is ordinarily resident in South Africa – your home in South Africa is still her
home. Her gross income therefore comprises her world-wide receipts and accruals. Because she is not rendering services outside
South Africa for or on behalf of an employer she will not enjoy the section 10(1)(o)(ii) exemption from normal tax (see further the
suggested solution to E-mails 3 and 4 above). Her net winnings from the American circuit will therefore be subject to South African
normal tax.
Suggested Solution to E-Mail 6
A natural person will be a resident of the Republic if he was physically present in South Africa for a period or periods exceeding
• 91 days in aggregate during the current year of assessment, and
• 91 days in aggregate during each of the five years of assessment preceding the current year of assessment, and
• 915 days in aggregate during the five preceding years of assessment.
First requirement
The person must be physically present in South Africa for more than 91 days in the current year of assessment.
Second requirement
The person must be physically present in South Africa for more than 91 days in each of the five previous years of assessment.
Third requirement
The person must be physically present in South Africa for more than 915 days in total during the five previous years of assessment.
Fourth requirement
The person must not be a person who was continuously absent from South Africa for a period of at least 330 days (see below in this
regard).
The so-called physical presence test deems a person to be a resident if he was present in South Africa for a total period of more than
• 91 days in the current, and
• 91 days in each of the preceding five years of assessment, and
• a total period of more than 915 days during the preceding five years of assessment.
The 91 days and the 915 days of physical presence need not be continuous. The 915-day period applies to the preceding five years of
assessment and not to the current year of assessment. It will, therefore, be necessary for a person to keep detailed records of physical
presence in South Africa.
Part days
A day will include a part of a day for the purposes of the determination of the days of physical presence in South Africa. This means that
the days of arrival in and departure from South Africa will count as days of being physically present in South Africa.
Continuous absence
A person who is a resident under the so-called physical presence test will be deemed not to be a resident if he is physically outside
South Africa for a continuous period of at least 330 full days immediately after the day on which he ceases to be physically present in
South Africa. He will be deemed not to have been a resident from the day on which he ceased to be physically present in South
Africa.

**2018** /continued on page 3

 SUGGESTED SOLUTION TO EXERCISE 3.7
Page 3 of 5 pages
The period of 330 days must be continuous. Because this concession applies only to a person who has met the so-called physical
presence test, he must have been physically present in South Africa for more than 91 days in the current year of assessment. It
follows that the period of 330 days will cover two years of assessment, since a total period of 421 days (91 days plus 330 days) is
required,
• the first, being the year of assessment in which the person was last considered to be a resident under the so-called physical presence
test, and
• the second, being the following year of assessment.
The concession applies from the commencement of the 330-day period, so that the qualifying person will be a resident for part of the first
year of assessment and a non-resident for the remainder of the first year.
It is only after the 330-day period has been fulfilled that the person will be deemed not to be a resident.
Contract employment
• In the 2018 year of assessment you will be in South Africa for 240 days if you agree to work on the contract in South Africa.
• In the 2017 year of assessment you were in South Africa for 215 days (1 March 2016 to 31 October 2016).
• In the 2016 year of assessment you were in South Africa for 366 days (1 March 2015 to 29 February 2016).
• In the 2015 year of assessment you were in South Africa for 365 days (1 March 2014 to 28 February 2015).
• In the 2014 year of assessment you were in South Africa for 305 days (365 days – 60 days).
• In the 2013 year of assessment you were in South Africa for 365 days (1 March 2012 to 28 February 2013).
You were physically present in South Africa for more than 91 days in each of the five previous years of assessment and for more than
915 days during the five previous years of assessment. Therefore if you spend more than 91 days in South Africa in the current year of
assessment you will be a resident of the Republic as defined.
Suggested Solution to E-Mail 7
Being a resident of the Republic your South African gross income will comprise your world-wide receipts and accruals. Your two
foreign pensions, your foreign net rentals, your foreign dividends, your foreign annuities and your foreign interest will all be included
in your South African gross income. But then your two pensions are exempt from normal tax from normal tax under
section 10(1)(gC)(i) and (ii). Under the provisions of section 10B(3), a portion (being 25 / 45 or 55,56% of your foreign dividends
will be exempt from normal tax in South Africa. Put differently section 10B(3) results in 44,44% (100% – 55,56%) of a foreign
dividend being subject to normal tax. And at a 45% marginal tax rate, the normal tax payable on a foreign dividend is effectively
20% (45% of 44,44%).
None of your other receipts and accruals is ‘specifically’ exempt from normal tax in South Africa. You will therefore be subject to
normal tax in South Africa on your foreign net rentals, a portion (being 25 / 45 or 55,56%) of your ‘foreign’ dividends, your foreign
annuities and your foreign interest.
Suggested Solution to E-Mail 8
The term ‘ordinarily resident’ is not defined in the Income Tax Act. Its meaning has, however, been examined in numerous cases.
The factors to consider when deciding on whether a taxpayer is ordinarily resident are the following:
• The degree of continuity.
• The mode of life of the taxpayer.
• The taxpayer’s ‘physical presence’ – although this is not essential.
• His intention of being in a country. In this regard the courts have held that his ‘domicile’ (in the legal sense) is irrelevant, but his
intention of being in a country is.
• The facts surrounding the matter.
Two cases from the Appellate Division of the Supreme Court (now the Supreme Court of Appeal) dealt with the meaning of the term
‘ordinarily resident’. These cases were Cohen v CIR (1946 AD 174, 13 SATC 362) and CIR v Kuttel (1992 (3) SA 242 (A), 54
SATC 298).
Cohen
Cohen was one of the two directors of OK Bazaars (1929) Ltd. Because it was difficult to obtain merchandise in South Africa during
the second world war was, he on behalf of OK Bazaars (1929) Ltd, proceeded abroad to act as its buyer. He was accompanied by his
wife, three children and a nurse. He established himself with his wife and family in an apartment in New York from October 1940.
Although he had originally planed to be outside South Africa for only nine months, this period was extended by a year, and up to
30 June 1942 neither he, nor his family had returned to South Africa. In 1939 he had leased a flat in Johannesburg for five years. He
then furnished it. He sublet this now ‘furnished’ flat while he was in New York.
While in New York Cohen earned dividends from South African public companies. He claimed that these dividends were exempt
from normal tax from normal tax in South Africa because he was not ‘ordinarily resident’ and not ‘carrying on business’ in South
Africa in the years of assessment of dispute.

**2018** /continued on page 4

 SUGGESTED SOLUTION TO EXERCISE 3.7
Page 4 of 5 pages
Schreiner JA, who delivered the judgment of the Appellate Division, said the following (at SATC 371):
‘If, though a man may be “resident” in more than one country at a time, he can only be “ordinarily resident” in one, it would be
natural to interpret “ordinarily” by reference to the country of his most fixed or settled residence. But his ordinarily residence would
be the country to which he would naturally and as a matter of course return from his wanderings, as contrasted with other lands it
might be called his usual or principal residence and would be described more aptly than other countries as his real home. If this
suggested meaning were given to “ordinarily” it would not, I think, be logically permissible to hold that a person could be “ordinarily
resident” in more than one country at the same time.’

A person can be ordinarily resident in a country from which he was absent throughout the year of assessment. The question whether
a person is ‘ordinarily resident’ in South Africa does not depend solely upon his actions during that particular year. An investigation
of his lifestyle before, or even after, the year of assessment may be necessary to reach a conclusion.
The Appellate Division held that the question whether an individual was ordinarily resident in a particular area for the purposes of
the Income Tax Act was one of fact. There was evidence to find that Cohen had been unable to prove that he was not ordinarily
resident in South Africa. It also found that the question whether an individual was in year of assessment ordinarily resident in South
Africa, or elsewhere, was not to be determined solely by his actions during that particular year of assessment. His conditions of
ordinarily residence during that particular year could be determined by evidence as to his mode of life outside the year of assessment
under consideration.
Finally, it found that physical absence during the whole of the year of assessment was not decisive of the question of ‘ordinary
residence’.
It was unnecessary for the Appellate Division to decide whether a person could be ordinarily resident in more than one country at the
same time.
Kuttel
Kuttel had emigrated from South Africa to America in July 1983. Prior to emigrating he had sold some of his assets and invested the
proceeds in ESKOM stock. In addition to this investment, he held shares in the company that owned the private residence that he lived
in when he was resident in South Africa. This residence was not let on his departure but was kept vacant to provide him with
accommodation when he returned to South Africa. He did not give up his directorship of a private company when he left South
Africa. Between July 1983 and 28 February 1986 he returned to South Africa on 10 occasions, each for a period of less than two
months. On two of these occasions he attended directors’ meetings. On all 10 occasions he stayed in his former private residence.
The main purposes of Kuttel’s visits to South Africa were domestic matters, including
• the schooling of his children,
• the building of a private yacht,
• competing in a yacht race in South Africa,
• attending his late brother’s funeral, and
• supervising his various investments and business interests in South Africa.
The Commissioner, when assessing Kuttel for South African normal taxation, had not granted him
• the section 10(1)(h) exemption from normal tax for his interest earned on the ESKOM stock, and
• the section 10(1)(k) exemption from normal tax for his dividend receipts and accruals.
The Commissioner believed that Kuttel was both ‘ordinarily resident’ in South Africa and ‘carrying on business’ in South Africa.
The lower court being the tax court, namely, in ITC 1501 ((1989) 53 SATC 314) found that
• he was ordinarily resident in America and not in South Africa, and
• the mere fact that he was a director of a company did not mean that this directorship constituted the carrying on of a business.

He was therefore neither ordinarily resident nor carrying on business in South Africa. This meant that the exemption from normal tax
provisions, namely, section 10(1)(h) and section 10(1)(k) were available to him. Accordingly, the interest from the ESKOM stock and
the dividends earned by him were exempt from normal tax in South Africa.
The Commissioner appealed against the decision to the Appellate Division, but only on the question of the taxpayer being ‘ordinarily
resident’ in South Africa.
The Appellate Division agreed with the judgment given in ITC 1501 finding that Kuttel was not ordinarily resident in South Africa.
In the Appellate Division, Goldstone JA, giving the unanimous judgment, held that (at SATC 306)
‘a person is “ordinarily resident” where he has his usual or principal residence, that is, what may be described as his real home’.
In the light of the above two judgments, and from what you have informed me in your e-mail, your brother’s real home is not in
South Africa.
As a result, Kuttel is not ordinarily resident in South Africa.
Also Kuttel ‘wonders’ to South African. He does not ‘return from his wonderings’ to South Africa.

**2018** /continued on page 5

 SUGGESTED SOLUTION TO EXERCISE 3.7
Page 5 of 5 pages
Suggested Solution to E-Mail 9
Being a resident of the Republic you will be required to include in your South African gross income your foreign dividends, the proceeds
from the sale of your foreign shares (held as trading stock) and your foreign interest.
You must include in your gross income the ‘gross’ amount of these foreign dividends. This ‘gross’ amount would be R30 000 (the ‘net’
R25 500 plus the foreign withholding tax of R4 500). The foreign withholding tax paid on them of R4 500 will be allowed as a credit
against the resulting South African normal tax payable on these dividends (under the section 6quat rebate).
Although the proceeds from the shares held as trading stock are included in your gross income, the cost of these shares is then deductible
in the determination of your taxable income. You will therefore be subject to normal tax on only the net profit from your share deals.
The foreign interest must also be included in your South African gross income.
A foreign dividend exemption from normal tax is, however, available to you. It results in 55,56% (25 / 45) of your foreign dividends
being exempt from normal tax.
A portion of the stockbroker’s fee will be deductible in the determination of your taxable income. Only the portion relating to your share-
dealing activities will be deductible in the determination of your taxable income. Since you are not ‘trading’ when earning dividends and
interest, that portion of the stockbroker’s fee relating to your dividend and interest receipts and accruals is not deductible in the
determination of your taxable income (section 11(a) and section 23( f ) and (g)).
Suggested Solution to E-Mail 10
Being a ‘local’ private company its world-wide receipts and accruals must be included in its South African gross income. The profit
from the branch enjoys a ‘temporary’ concession from normal tax in South Africa. Because the remission of this profit to South
Africa is being ‘blocked’ for a period of five years, this profit is subject to normal tax in South Africa only when this ‘blocking’
(restriction) period is over under the provisions of section 9A.
Section 9A(1) provides that when an amount, or a portion of an amount, received by or accrued to a person that is required to be
included in his income during a year of assessment may not be remitted to South Africa during that year as a result of currency or
other restrictions or limitations imposed under the laws of the country where it arose, he is allowed to deduct from his income for that
year, an amount equal to so much of the amount or portion that is required to be included in his income for that year that may not be
remitted.
Under section 9A(2), the amount or portion that is allowed to be deducted during the year of assessment contemplated in
section 9A(1) is then deemed to be an amount received by or accrued to him in the following year of assessment.
The foreign blocked funds are deducted from current income and are deemed to be received or accrued in the subsequent year. This
inclusion and deduction continues until the foreign funds are no longer blocked.
The ‘local’ private company will therefore include its branch profit in its gross income without a matching deduction in five year’s
time when this profit may be freely used by it.

**2018**
 SUGGESTED SOLUTION TO EXERCISE 3.9
Page 1 of 2 pages
Double and Trouble
The originating cause of the profit from the legal practice is the services rendered. The source is therefore 80% in Swaziland and 20% in
South Africa. The 20% will therefore be subject to normal tax in South Africa. There is no provision that deems the 80% to be from a
South African source. The 80% portion is therefore not subject to normal tax in South Africa.
Colonel Maze
Paragraph (gA) of the definition of ‘gross income’ specifically includes in gross income an amount received or accrued from another
person as consideration for the imparting of or the undertaking to impart scientific, technical, or commercial knowledge or information
(so-called know-how). It also specifically includes in gross income amounts received or accrued from another person for the rendering
of, or the undertaking to render an assistance or service in connection with the application or use of scientific, technical, or commercial
knowledge or information.
But for a non-resident, before the so-called special inclusions of the definition of ‘gross income’ can apply, the receipt or accrual must be
from a South Africa source. In other words, the provisions of paragraph (gA) do not apply to receipts and accruals that do not have their
source in South Africa.
The originating cause of Colonel Maze’s fee is the wits and intellect employed by him in Ireland. The source of the R25 000 he earned is
therefore in Ireland.
But then section 9(2)(e) provides that when, amongst other things, knowledge is used in South Africa, the fee for this knowledge is from
a South African source. And then section 49B specifically subjects amounts earned by a non-resident for ‘know how’ used in South
Africa to a withholding tax of 15% calculated on the gross amount of the ‘know how’ award.
Richard Shift
The originating cause of the commission earned by Richard Shift is his business in Mozambique where his capital, wits, etcetera, are
employed. The commission therefore has its source in Mozambique. It is not deemed to be from a South African source.
The profit on the sale of the manufactured goods has as its originating cause in the factory where the goods are manufactured, namely, in
South Africa. The activity of production in South Africa caused the income produced by the manufacturer to be from a South African
source. Thus, its source is in South Africa.
Simon Ticket
The source of Simon Ticket’s remuneration for the services he rendered is where those services are performed, namely, Cape Town. The
place of the payment of his salary is irrelevant.
Clinton Devros
Section 9(2)(b) states that interest earned from funds lent to a South African resident is from a South African source. The R16 000
interest that accrues to Clinton Devros (R2 000 000 at 8%) therefore has its source in South Africa.
This interest may, however, be exempt from normal tax under section 10(1)(h).
Nadine Brink
The source of a royalty from a book accruing to its author is where the wits, labour and intellect of the author are employed, regardless of
where the book is published or where payment of the royalty is made (Millin v CIR ((1928) AD 207, 3 SATC 170). For Nadine Brink the
source of her royalties will be in Zimbabwe.
But the royalties from the sale of Nadine Brink’s book in South Africa are then from a South African source under the provisions of
section 9(2)(c).
The provisions of section 49B then apply to this royalty. A withholding tax of 15% is levied on the gross royalty that accrues to Nadine
Brink from sales of her book in South Africa. Then because these royalties are subject to this withholding tax on royalties, they are then
exempt from normal tax under section 10(1)(l).
Under section 9(2)(b), the source of Nadine Brink’s interest on the bank deposit account in South Africa is in South Africa. This interest
may, however, be exempt from normal tax under section 10(1)(h).
Royalty from Zimbabwe
The royalties earned by Nadine Brink from Zimbabwe do not form part of her South African gross income. Their source is in
Zimbabwe. Since they are not from a South Africa source under section 9(2)(c) or (d), section 9(4)(c) then provides that they are
from a non-South African source. Therefore the royalties from the sale of her book in Zimbabwe are not subject to South African
normal tax.
And because the royalty-producing asset was not used in South Africa (it was used in Zimbabwe), the provisions of section 49B also
do not apply to the royalty earned by Nadine Brink from it.
Royalty from South Africa
The royalties from sales of Nadine Brink’s book in South Africa would be included in her South African gross income because, they are
from a South Africa source under section 9(2)(c) or (d).
**2018** /continued on page 2
 SUGGESTED SOLUTION TO EXERCISE 3.9
Page 2 of 2 pages
Section 49B subjects to the withholding tax on royalties, amongst other things, amounts received or accrued to a non-resident by way of
a ‘royalty’ that is from a South African source for the use or the right of use, or the grant of use in South Africa of intellectual property as
defined in section 23I. Under this definition, intellectual property includes a patent, a design, a trade mark, copyright, property or a right
or a similar nature or knowledge connected to use of a patent, a design, a trade mark, copyright, property or right. It matters not where
the ‘royalty-producing’ asset has been produced or made and it matters not where payment is made.
The withholding tax on royalties is levied at a rate of 15% on the gross royalty.
The royalty from South Africa that accrues to Nadine Brink is therefore subject to the withholding tax on royalties at a rate of 15% of the
gross amount. And then because the provisions of section 49B apply to this royalty, it is then exempt from normal tax under
section 10(1)(l).
Quinton Retiro
The source of Quinton Retiro’s pension will be where his services that relate to it were rendered. But section 9(2)(i) deals specifically
with his situation as follows:
Quinton Retiro’s pension is from a South African source in proportion to the period worked as follows:
• From a South African source = Total period worked in South Africa / Total period worked with employer × Annual amount
• From a South African source = 8 / 20 × R180 000 = R72 000. This amount is then subject to normal tax in South Africa.
Eric Entabe
The source of an annuity arising out of a testamentary trust is the place where the will (the originating cause) was drawn up. Eric
Entabe’s father drew up his will in South Africa. An annually from a South African source is subject to normal tax in South Africa.
How the annuity is financed is irrelevant, namely, the source of the funds, and capital or revenue nature of it do not affect its inclusion in
gross income in South Africa.
Since Eric Entabe’s annuity has its source in South Africa, the entire R120 000 is included in his South African gross income.
**2018**
 SUGGESTED SOLUTION TO EXERCISE 3.11
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Johannes Burg
Pension the equivalent of R21 000 a month
Since Johannes Burg worked for Washington Corporation of America in South Africa for some time when working for it, the provisions
of section 9(2)(i) will apply.
South African source
Total number of years worked by Johannes Burg in South Africa = 9,5 years.
Total number of years worked by Johannes Burg anywhere = 17,5 years.
The amount that accrues to Johannes Burg from a South African source is then R136 800 (9,5 / 17,5 × R21 000 × 12).
R12 000 pension
Since Johannes Burg’s services were rendered for the South African Government, the entire pension that accrues to him from the South
African Government is from a South African source, under section 9(2)(h):
100% × R4 000 × 12 = R144 000
Since the provisions of section 9(2)(h) apply to an amount that is received or accrued for services rendered to an employer that is a
‘government’ entity, they will apply to a pension that was awarded by the South African Government. A pension is awarded for services
that have been performed.
Purchased annuity
The source of Johannes Burg’s annuity is in South Africa where the contract was entered into by him. It must then be included in his
South African gross income. But only a portion of this annuity is subject to normal tax in South Africa. The exempt from normal tax
portion as provided for in section 10A is determined as follows:
Y=A/N×C
Y = R450 000 / (10 × R60 000) × R60 000
Y = R45 000

The taxable portion to be included in Johannes Burg’s South African income is thus R15 000 (R60 000 – R45 000).
Income
Johannes Burg’s South African income is as follows:
• From the R21 000 a month equivalent pension 136 000
• From the R12 000 a month pension 144 000
• From the R60 000 annuity 15 000
Income 295 600

**2018**
 SUGGESTED SOLUTION TO EXERCISE 3.12
Page 1 of 2 pages
Al Black
2018 year of assessment
Al Black and the bank management would like to know the South African normal tax consequences of
• the equivalent of R6 000 paid to him for scoring tries in South Africa,
• the equivalent of R30 000 held in trust for his possible benefit, and
• the interest equivalent of R900 earned on these ‘trust’ funds.
Payment for scoring tries
It may be argued that Al Black is not a professional rugby player and therefore an amount that he earns for playing rugby must be of a
capital nature and therefore not subject to normal tax. But paragraph (c) of the definition of ‘gross income’ includes an amount in gross
income if there is a causal relationship between the amount awarded (even if made as a voluntary award) and the services rendered (or to
be rendered). This is the position in relation to the agreement between the bank and him. It may be simply stated as follows:
‘Al Black score a try and for this service you will be paid the equivalent of R1 000.’
The causal relationship is present and therefore the provisions of paragraph (c) of the definition of ‘gross income’ must apply. But even
though the ‘special inclusions’ overrule the capital nature requirement in the opening words of the definition of ‘gross income’, receipts
and accruals (they include capital receipts and accruals in gross income) they do not overrule the source requirements.
Under the South African Income Tax Act, amounts derived by a non-resident from a source within South Africa that are not of a capital
nature constitute gross income, irrespective of the place of residence of the non-resident, and are thus subject to normal tax in South
Africa.
There is no definition in the Income Tax Act of the word ‘source’ since it is impossible to define satisfactorily the qualities that will
determine the source of receipts and accruals in all circumstances. As was indicated by Watermeyer CJ, who delivered one of two
majority judgments of the Appellate Division of the Supreme Court (now the Supreme Court of Appeal) in CIR v Lever Bros & Unilever
Ltd (1946 AD 441, 14 SATC 1) it is probably an impossible task to formulate a definition that would furnish a universal test for the
determination of when an amount is received or accrued from a source within South Africa.
Centlivres CJ, in delivering the majority judgment of the Appellate Division in CIR v Epstein (1954 (3) SA 689 (A), 19 SATC 221)
pointed out that the legislature was probably aware of the difficulty in defining the term ‘source within the Republic’ and therefore gave
no definition. Consequently, it is for the courts to decide on the particular facts of each case whether a particular amount has been
received or accrued from a source within South Africa.
The Lever Bros case lays down that by ‘source’ is meant ‘the originating cause’. The problem then involves an inquiry into the following
two matters:
• What is the originating cause of the income?
• Is this originating cause in South Africa?
While the High Court has yet to consider the point, the tax court has consistently laid down that the source or originating cause of
amounts earned from employment and other services rendered is the service, irrespective of the place where the contract is made or the
remuneration is paid. Thus, the source of the remuneration would be located where the services are rendered.
The remuneration earned by or the prize won by a visiting sportsman for the rendering of a service in South Africa is from a source
within South Africa, is not of a capital nature, and is therefore included in his South African gross income. The only situation when it
will not be subject to normal tax is if it is exempt from South African normal taxation under another provision (see below) or a double
taxation agreement.
The originating cause of the ‘try rewards’ was the scoring of the tries by Al Black, and not the agreement he entered into with the bank.
If he had not scored a try he would not have received a ‘try reward’.
As a result of what has been stated above, Al Black will include in his South African gross income the equivalent of R6 000 awarded to
him for scoring tries in South Africa.
But then Al Black is an ‘entertainer or sportsperson’ as defined in section 47A(a)(ii). And him playing rugby in South Africa is a
‘specified activity’ as defined in section 47A(b). It follows then the tax levied will be the section 47B ‘tax on foreign entertainers or
sportspersons’. It is levied at a rate of 15% (on the gross amount earned). The R6 000 is then exempt from normal tax under
section 10(1)(lA).
Amount in the trust account
An amount is gross income if it is either ‘received by’ or if it ‘accrues to’ a taxpayer.
The R30 000 does not accrue to Al Black since he is not unconditionally entitled to it – he can claim it as his own without a condition
being imposed on it, only after he has worked for the local bank for a period of at least six months after his return from South Africa.
But is it received by Al Black? A receipt is a receipt for gross income purposes only
• when it is received by the taxpayer for his own use and his own benefit (CIR v Geldenhuys (1947 (3) SA 256 (C), 14 SATC 419)),
• when it is intended both by the giver and by the receiver to be a benefit passing between them (COT v G (1981 (4) SA 167 (ZA), 43
SATC 159)), and
• when it is accepted by the recipient as his own that is, when he deals with it, and when he is free to do with it what he likes.
**2018** /continued on page 2
 SUGGESTED SOLUTION TO EXERCISE 3.12
Page 2 of 2 pages
The actions carried out by the local bank and Al Black indicate that he has not as yet received the R30 000. His actions reveal that at this
point in time, the R30 000 has been received only in a ‘trustee’ type situation, and not yet as a ‘gross income’ type receipt.
Since the R30 000 has neither been ‘received by’ Al Black, nor has it ‘accrued to’ him, in the 2018 year of assessment, this amount
should not be included in his 2018 gross income.
Also the R30 000 is not from a South African source, and because Al Black is a non-resident, it would not be included in his South
African gross income.
Interest
As at 28 February 2018 Al Black was not entitled to the interest of R900. In addition, he had not received it at that point in time. It
should not therefore be included in his 2018 gross income.
2019 year of assessment
On 1 April 2018 Al Black receives for his own use and for his own benefit R31 080. But as pointed out above, the R30 000 and the
interest of R1 080 earned on the R30 000 are not from a South African source, and because Al Black is a non-resident, they would not be
included in his South African gross income.

**2018**
 SUGGESTED SOLUTION TO EXERCISE 3.15
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Charlie Right
The source of the salary earned by Charlie Right is the place where he rendered his services. They were rendered outside South Africa.
A salary received from the South African Government for services rendered on its behalf under an employment contract is, however,
from a South African source under section 9(2)(h).
But then section 10(1)(p) grants an exemption from normal tax to a person who is not ordinarily resident in South Africa,
• for an amount received or accrued as a result of services rendered by him outside South Africa on behalf of the Government,
• if this amount is chargeable with income tax in the country in which he is ordinarily resident, and
• the income tax so chargeable is borne by himself and is not paid on his behalf by the Government.
Charlie Right will therefore qualify for this exemption from normal tax.
As a result he will not be liable for South African normal tax.
Godfrey Davis
Under section 9(2)(i), the source of the pension enjoyed by Godfrey Davis for the services he rendered is the place where the services
were rendered. His pension is therefore caused by 18 years service in Australia and 12 years service in Durban (1 March 1999 to
28 February 2009 and 1 March 2014 to 29 February 2016).
If a person enjoys a pension for services that were rendered partly within and partly outside South Africa, only a portion is deemed to be
derived from a source within South Africa. For Godfrey Davis this portion is determined as follows:
(R15 000 × 12 months) × 12 / 30 = R72 000.
Under section 9(2)(b), the source of the R75 000 interest from the interest-bearing securities is in South Africa.
He arrived in South Africa on 25 August 2017. He would have been in South Africa for 183 days on 23 February 2018. The interest of
R6 500 that accrued to him on 28 February 2018 is then not exempt from normal tax, since he has then been in South Africa for a period
exceeding 183 days in aggregate in the 12-month period preceding the receipt or accrual of this interest.
He does, however, qualify for the section 10(1)(i) exemption from normal tax – the basic local interest exemption from normal tax for
the first R23 800 of not otherwise exempt from normal tax local interest for the R6 500 interest that accrued to him on 28 February 2018.
It follows then, that of the R78 000 local interest that accrues to him in the 2018 year of assessment,
• R71 500 is exempt from normal tax under section 10(1)(h), and
• R6 500 is exempt from normal tax under section 10(1)(i).
Interest that accrues to him is subject to the 15% withholding tax on interest (section 50B(1)). But the R6 500 interest that accrues to him
on 28 February 2018 is exempt from the 15% withholding tax on interest since he has then been in South Africa for a period exceeding
183 daysin aggregate in the 12-month period preceding the (section 50D(3)(a)).
Sin-Dee Clawford
The interest has been received by or accrued to Sin-Dee Clawford, who is a resident of the Republic. Since the world-wide receipts and
accruals of a resident are included in his gross income, she will be required to include the R40 000 in her gross income.
Sin-Dee Clawford does not qualify for the section 10(1)(i) basic local interest exemption from normal tax of the first R23 800 of not
otherwise exempt from normal tax local interest for foreign interest.
The source of Sin-Dee Clawford’s earnings as an entertainer at the night-club on the Cape Town Waterfront is in Cape Town where she
carried on this business. The R120 000 including the R20 000 tips, is therefore included in her South Africa gross income. No portion of
it is exempt from normal tax.
Miser Able
Miser Able’s salary has its source is Las Vegas. There is no deeming provision to deem it to be from a South African source.
Miser Able’s interest from the ESKOM stock has its source is the South African. But then the section 10(1)(h) exemption from normal tax
is available to him since he is not a resident of the Republic and this interest is not effectively connected to a permanent establishment of
his in South Africa. He therefore has no income that is subject to normal tax in South Africa.
Miser Able will not enjoy a section 21 reduction since he does not have a South African taxable income.
Depend Able
The source of the alimony that accrues to Depend Able is in South Africa because the divorce was granted in South Africa. The
section 10(1)(u) exemption from normal tax is unavailable because the divorce took place before 21 March 1962. She will therefore be
subject to normal tax in South Africa on the R18 000 (R1 500 × 12) alimony that accrues to her.
Tracy Brain
Tracy Brain’s speaker’s fee has its source is South Africa, the place where the services were rendered by her. She is not an
‘entertainer or sportsperson’ as defined in section 47A. This means that she is not liable for the foreign entertainers and sportspersons
tax that is levied under section 47B on her speaker’s fee. It also means that her speaker’s fee is not then exempt from normal tax
under section 10(1)(lA).
Under section 9(2)(c), the source of the royalties from sales of the tax guide is in South Africa since it was purchased by residents.
The provisions of section 49B then apply to this royalty because it is from the sale of the booklet in South Africa and because it
accrued to a non-resident. And then, because the royalties have been subject to the withholding tax on royalties under section 49B,
the section 10(1)(l) exemption from normal tax is available to her. This means that the R16 000 is exempt from normal tax but
subject to the section 49B withholding tax on royalties. This tax is levied at a rate of 15% on the gross royalty.
**2018**