Recap Gross Income
and Special Inclusions
Chapter 3 and 4
MS MANOKO
Learning Outcomes
Demonstrate an in-depth knowledge of each requirement of the definition of gross income.
Determine whether a natural person is a resident for income tax purposes.
Apply the principles of relevant case law in order to illustrate the meaning of the terms used
in the definition of gross income.
Demonstrate an in-depth knowledge of the criteria to be applied in order to distinguish
between capital and income for purposes of the definition of gross income.
Identify or explain which amounts should specifically be included in ‘gross income’ even
though they may be of a capital in nature.
Normal Tax – Framework
Gross Income XXXX
Less: Exempt income (XXX)
Income XXX
Less: Deductions and allowances (XX)
Less: Assessed loss (XX)
Add: Other amounts included in taxable income (E.g., recoupment) XX
Add: Taxable Capital Gain XX
Less: Deductions in terms of s 11F (XX)
Less: Deductions in terms of s 18A (XX)
Taxable Income XXXX
Normal Tax per progressive tax table XXX
Less: 6(2) (XX)
Add: Additional tax in terms of s 12T(7)(a) and (b) XX
Less: Section 6A and 6B rebates (XX)
Normal Tax for the year XXXX
Less: PAYE, Provisional Tax, and s 35A WHT (XXX)
Normal Tax Payable by or refundable to a natural person XXX
Definition – Gross Income
Gross Income meaning –s1:
In the case of a resident:
• Total amount, in cash or otherwise
• Received by or accrued by or in favour of the resident
• During the year of assessment
• Excluding receipts or accruals of a capital nature
Definition – Gross Income
Gross Income meaning –s1:
In the case of a non - resident:
• Total amount, in cash or otherwise
• Received by or accrued by or in favour of the non -
resident from a source within the republic of South Africa.
• During the year of assessment
• Excluding receipts or accruals of a capital nature
Definition – Gross Income
Elements Resident Non - Resident
Total amount √ √
In Cash or otherwise √ √
Received by or accrued in favour of √ √
During the year of assessment √ √
From a source from the republic of South Africa X √
Not of capital in nature √ √
Resident Vs non-resident.
Gross
Income – Change of residency
focus areas
for Capital in nature (certain transactions)
Individuals
The other elements of the Gross Income
definition are the same for all taxpayers – were
covered in first semester (Will just be assessed)
Residence of a Natural
Person – par (a) of the
definition of resident in s1:
Residence
• A natural person is a resident if
he or she is either:
✓ordinarily resident in South
Africa, or
✓meets the requirements of the
physical present test.
Ordinarily resident in South
Africa:
Residence – • Not defined in the Income Tax Act
• Case laws are used to interpret its
ordinary meaning
residence
Two court cases:
• Cohen
• Kuttel
Facts:
•A taxpayer owned a flat in
Residence – Johannesburg
ordinary •Moved to America with his family
residence, for work for two years, and
Cohen (Court •Leased his flat
Case) Issue:
•Is the taxpayer ordinarily resident in
SA while working overseas for two
years?
Judgement:
• A man can be a resident in more than one
Residence – country
• But he can be an ordinary resident in only one
ordinary country
• Ordinary resident is interpreted by
residence, ✓Most fixed
Cohen (Court ✓Or Settled Country
Case) Principle:
• A person is ordinarily resident in the country to
which he intends to return from all his wanderings.
• The country he regards as his real home
Facts:
• Taxpayer emigrated to America and
Residence – started his life there.
ordinary • He visited South Africa to pursue business
interest and take part in yachting
residence, activities.
• During these visits, he stayed in his home in
Kuttel (Court Cape Town which he maintained and
Case) renovated.
Issue:
• Is the taxpayer ordinarily resident in South
Africa?
Judgement:
• A person is ordinarily resident
Residence – • Where he has his usual or principal
ordinary residence
residence, • That is what may be described as his
real home
Kuttel (Court
Case) Principle:
• A person is ordinarily resident where
the person’s principal resident is –
where the person is habitually and
normally resident
Residence – ordinary residence, Interpretation Note 3 (issue 2)
– Other factors
Other factors to consider
• Habitual abode
• Family and Social relations
• Nationality or Citizenship
• Employment and economic factors
• Frequency of and reasons for visits
• Intention
When does a person begin and end to be
ordinarily resident?
Ordinarily resident in SA:
o Emigrating from SA – ceases to be a resident on the day immediately before ceasing to be a
resident.
Date of emigration
01/03/2023 31/08/2023 01/09/ 2023 29/02/2024
Taxed as Resident Taxed as a Non – resident
When does a person begin and end to be
ordinarily resident?
Ordinarily resident in SA:
o Immigrating to SA – ceases to be a resident on the day immediately before ceasing to be a
resident.
Date of immigration
01/03/2024 31/08/2024 01/09/ 2024 28/02/2025
Taxed as Resident Taxed as a Non – resident
When will the physical
present test start to apply?
Residence - •During the year of assessment that
a natural person is not ordinarily
Physical resident in South Africa.
Presence Test
What does it imply?
•You are an SA resident for tax
purposes
What is the test?
•Physically present in SA for > 91
Residence - days in aggregate, in the current
Physical year,
Presence Test •Physically present in SA for > 91
days in aggregate during each of
the prior 5 years, and
•Physically present in SA for > 915
days in aggregate during the
prior 5 years.
What is a day for the
purposes of Physical
Residence - Presence Test?
Physical •Part of a day is treated as a full
Presence Test day.
•A day the person spend in transit
not formally enter South Africa
through a port of entry is not
counted as a day the person was
Physically Presence in South Africa.
When does a person begin and
end to be a resident in terms of
Physical Presence Test?
Residence -
• If a person meets the Physical Presence
Physical Test during the year of assessment that
Presence Test person is a resident from the beginning
of that year of assessment.
• A person ceases to be a resident if
outside South Africa for a continuous
period of 330 full days. Cease to be a
resident from the day he/she left South
Africa
Purpose of DTAs
Impact of •Solve dual residency issue
Double •Allocate taxing rights
Taxation
Agreements Impact on residency:
(DTAs) on •Overrides local laws
residency •An individual is a resident in
the country in which the
DTA says he is a resident in
Steps to determine the residency of an individual
1 2 3
Is the person a resident in Is the person ordinarily Does the person meet the
another country in terms of resident in SA? Physical Presence Test?
the DTA? •Yes, the person is a resident •Yes, the person is a resident
•Yes, the person is a resident in South Africa. in South Africa.
in the country that the DTA •No, move to step 3 •No, the person is not a
says he is resident in South Africa
•No, move to step 2
Gambling as a business:
•When it is done systematically
Capital in such that it is a business or
scheme of profit making
nature – •Winnings are revenue in nature
Gambling
Gambling for entertainment
or as a hobby:
•The related winnings/stakes are
capital in nature
Horse-racing as a business:
• Racing stakes won by racehorse
owners for activities carried on as a
Capital in business or in pursuance of scheme
nature – of profit-making.
• Stakes are revenue in nature
Horse-racing
Horse-racing for
entertainment or as a hobby:
• The related winnings/stakes are
capital in nature
Money or assets:
• Received by way of a gift,
Capital in donation, or inheritance
nature – Gifts, • They are capital in nature
donations,
and Subsequent sale:
inheritances • Proceeds remain capital in
nature unless sold in
pursuance of a profit-making
scheme or business
What it is?
• A contract in which a person
Capital in undertakes not to exercise a trade,
profession or occupation in a
nature – specified area for a defined period
Restraint of of time in return for a compensation.
trade • The person is selling his ability to
generate further income ( capital
payments structure)
Payment received:
• Is capital in nature
Special Inclusions
Amounts are included in gross income in terms of the general
definition of gross income (GI) (as covered in the previous slides) or
In terms of the specific inclusions to the definition listed in para (a) to
para (n)
• Includes capital in nature income
• Includes other income
Annuities – para (a)
Alimony or maintenance – para(b)
Special Restraint of trade (cA) and (cB)
inclusions –
focus areas Commutation of amounts due – para (f)
for Know-how payments – para (gA)
Individuals
Fringe benefits para (i)
Dividends – para (k)
Para (a) specifically includes in GI
amounts received or accrued by way of
• An annuity
• A living annuity – annuities from funds
Annuities – • An annuity amount as defined in s10A(1) - to be
covered in detail under exemptions topic
para (a) Not divided into capital and revenue -
they are taxed in full irrespective of
nature except for s10A annuity amounts.
Para (a) does not override the source
rules in cases of non-residents
Not defined in the Act – special
court case, ITC 761 (1952)
Annuities – Main characteristics of an
para (a) annuity:
• It is an annual payment (not defeated
if divided in instalments of a different
interval)
• It is repetitive
• It is chargeable against some person
Alimony or maintenance – para(b)
Para (b) includes in GI of the receiving spouse, alimony or
maintenance payments from the paying spouse for the
support of the spouse or former spouse and/or their children
Amount included is exempted in terms of S10(1)(u)(i) – why?
• Paid out of the after-tax income of the paying spouse.
Para (c) includes in GI amounts received or accrued in
respect of
•services rendered or to be rendered
•or any employment
•or the holding of an office
Services
‘Causal relationship’- services and payment (Crown mines
rendered – Ltd)
para(c)
Voluntary awards: part of gross income
Pre-payments: part of gross income
Anti – avoidance: amount received iro SR is deemed to
have been received by the person who rendered the
service
Exclusions from para (c):
• Amounts referred to in s8(1) – allowances
or advances to an employee by an
employer
Services • Amounts included in terms of para (i) of GI
rendered – – fringe benefits
• section 8B, and 8C
para(c)
Why do we have these exclusions?
• To avoid double counting them
• As they are covered by other special
inclusion paragraphs.
Services rendered – para(c)
Discuss whether the following amounts are included in gross income by
virtue of par (c):
A pension allowance paid to former employee by an employer as a result of
service contract or as a voluntary award.
Amount received on retirement in lieu of accumulated leave.
Salary received in lieu of the notice required to be given as per the
employment contract.
A prize won by an employee for excellent services rendered
Amounts received by way of ‘tips ‘ however small the service might be.
Restraint of trade (cA) and (cB)
A company’s or a person’s right to trade is an incorporeal asset
•Compensation paid for the restriction or loss of such right is a receipt of capital nature
Para (cA) and (cB) includes such payments in GI irrespective of the
fact that they are of capital nature
Para (cA) deals with restraint of payments received by a person who:
•is or was a labour broker without a certificate of exemption, or
•Is or was a personal service provider
•Is or was a personal service company or personal service trust
Para (cB) deals with restraint of
payments received by a person
who:
Restraint of
• Is natural person, which are related to any
trade (cA) past, present or future employment or the
and (cB) holding of an office.
The payer of the restraint of trade
amount is allowed a deduction in
terms of s11(cA) – to be covered
later under deductions topic
Commutation of amounts due – para (f)
Commutation means substitution, meaning that a person substitutes his
right to receive a certain benefit with the right to receive another
benefit
For example, an employee may substitute right to take lunch breaks and
work during his lunch breaks for a cash payment.
such a payment will be included in gross income in terms of this paragraph
Know-how payments – para (gA)
Know-how: scientific, technical, industrial or
commercial knowledge or information
Amounts received for such knowledge or
information is included in GI in terms of para (gA) in
full on receipt or accrual
Fringe benefits para (i)
Employees are taxed on the value of the fringe benefits
Fringe benefits are benefits from employer other than in cash
Para (i) includes fringe benefits in GI
If amounts is included in para (i) it is excluded from para (c ) of the GI
definition
Dividends para (k)
All dividends received or accrued are included in GI
in terms of para (k)
Foreign dividends received or accrued are also
included
The End
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