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CHAPTER 1 - DIRECT TAXES
A. Income Tax: Scheme of the Act
Income Tax is payable on taxable income. The taxable income comprises of gross income less exemptions and deductions (i.e. gross income - exemptions = income - deductions = taxable income). Capital receipts and accruals are not included in gross income, but are subject to capital gains tax. Taxable capital gains are included in taxable income at specified rates.
B. Income Tax on Resident Corporations (National Government)
1. Name of Tax and Levied in Terms of Which (Name, Number and Year)
Income Tax, Icome Tax Act, 58 of 1962 (hereinafter referred to as "the Act")
2. Department Responsible for Administration
South African Revenue Services (hereinafter referred to as “SARS”) headed by the Commissioner (hereinafter referred to as “the Commissioner”).3. Definition and Classification
The term "company" is widely defined in s 1 of the Act to include any:
4. Basis of Taxation
4.1 Source-based or residence based
As from 2001 South Africa's source-based income tax system was replaced by a residence-based income tax system. With effect from the years of assessment commencing on or after 1 January 2001 residents are (subject to certain exclusions) taxed on their world-wide income, irrespective of where the income is earned. Foreign taxes are credited against South African tax payable on foreign income. Foreign income and taxes are translated into the South African monetary unit, the Rand.
However, non-residents are taxed on income derived from source or deemed source fromSA.
4.2 If source, define:
The word "source" is not defined in the Act, it must be determined with reference to common law.
4.2.1 Actual source
In terms of common law, the enquiry as to the meaning of the word "source" is to determine the originating cause for the receipt or accrual of the amount and determining the geograhical location of the originating cause. Therefore, the originating cause is the activities of the taxpayer or the employment of his/her capital or assets. If the activities of the taxpayer are carried on or his/her capital or assets are employed in SA, the receipts or accruals derived from thoseactivities or the employment of capital or assets will be sourced in SA.
4.2.2 Deemed source
There are certain deemed source rules in the Act (i.e. section 9). These are amounts received or accrued to or in favour of a person by virtue of:
- royalties received or accrued to a person by virtue of use or the rightto use or the grant of permission to use intellectual property in SA;
- disposal of minerals extracted in SA or the carrying on of operations regulated by SA laws regarding mineral deposits
- services rendered or work done in any place if such work is at least 80% funded by the SA national, provincialor local government ("the government") budget and carried out on a contract basis with the SA government OR holdingof public office by a person appointed or deemed to be appointed in terms of an Act of Parliament (even where the public office is held outside the Republic
- pension or gratuity granted by the Government, any provincial administration or by any SA municipalityunder certain instances
- judicial order or written agreement of separation or an order of divorce under certain circumstances.
Capital gain or loss from disposal of assets where (subject to certain provisions):
- in the case of immovable property, where that propoerty is situated in SA
- in the case of any other asset, that asset is attributable to a permanent establishment situated in SA and the proceeds from the disposal of that assetare not subject to tax in any other country.
Interest derived from the utilisation or application in SA of any funds or credit obtained in terms of any interst bearing arrangement. In this regard, the place of utlisation of the funds will be deemed to be in SA if the person (individual) is ordinarily resident in the Republic or that person (other than an individual) has its permanent establishment in SA.
4.3 If residence, define:
4.3.1 Define resident
In terms of s 1 of the Act a persons other than a natural person is a SA resident if it is incorporated, established or formed in SA or if it has its effective management in SA. Companies which is incorporated, established, formed, or which has its place of effective management in South Africa is regarded as being resident in South Africa.
4.3.2 Exclusions from the definition of resident:
A person deemed tobe exclusively a resident of another country for purposes of the application of a DTA entered into between SA and that other country.
4.3.3 Ceasing of residency provided for in the Act
5. Time Tax is Levied
Tax is levied on an annual basis. The year of assessment of a company corresponds with its financial year.
6. Included in Tax Base
World-wide income.7. Year of Assessment
A company's year of assessment coincides with its financial year.8. Computation of Taxable Income
8.1 Exemptions
8.1.1 Partial exemptions (amounts exempt irrespective of the identity of the recipient):
Partial exemptions (amounts exempt irrespective of the identity of the recipient):
8.1.2 Absolute exemptions (taxpayers enjoying completed exemption from tax on income):
Amounts derived by the following taxpayers are exempt from tax:8.2 Deductions and recoupments
8.2.1 Allowable deductions
The Act provides for a general deduction formula as well as for special deductions:S 11(a):
General deduction formula:
A taxpayer who conducts a trade may deduct expenditure and losses actually incurred in the production of income during the year of assessment provided that the expenditure and losses are not of a capital nature.
Although, as a general rule expenditure is deductible in the year in which it was actually incurred, special provision is made in certain instances for the spreading of expenditure over a number of years. For example, in the case of interest expenditure (see E2) and where expenditure is incurred on goods, services or other goods all of which will not be supplied, rendered or enjoyed during the tax year (s 23H).
Special deductions:
8.2.2 Valuation of inventory/trading stock
The cost of trading stock (inventory) held and not disposed of at the end of the year of assessment is included in gross income. The cost so included is deductible in the next year of assessment as the value of opening stock. The cost of trading stock is determined according to specific rules.8.2.3 Reserves and provisions
Amounts transferred to a reserve fund are usually not deductible for income tax purposes (23(e)). However, the deductibility of amounts transferred to a reserve may be specifically authorised, for example, a SA resident who carries on business as a owner or charterer of a ship is allowed a deduction for repairs to be undertaken within a period of five years (s 14(1)(c))8.2.4 Non-deductible expenses
The following expenses may not be deducted:A prohibition exists against the deduction of expenditure to the extent to which it is recoverable under a contract of insurance, guarantee, security or indemnity.
Taxes, duties, levies, interest or penalties imposed under the Act, additional tax imposed under the Value Added Tax Act 89 of 1991 and interest or penalties payable in consequences of the late payment of any tax, duty or levy payable under any Act administered by the Commissioner is not deductible.
Income carried to a reserve fund or capitalised in any way, for example, a provision made for a contingent liability, is not deductible.
Expenditure incurred on amounts that are exempt from tax cannot be deducted.
Expenditure incurred is only deductible to the extent that it has been expended for the purposes of trade.
Notional expenditure, for example interest forfeited due to the investment of own capital in a business is not deductible.
Expenditure incurred by labour brokers, personal service providers are limited to the amount of remuneration paid or payable by it to its employees for services rendered that will be included in their taxable income.
It is specifically provided that an amount may not be claimed under more than one provision of the Act.
8.2.5 Recoupments
As a general rule amount claimed as a deduction for income tax purposes is included in a person's income in the year in which it is recovered or recouped (s 8(4)(a)). This includes the waiver or release of a claim whereby a person is relieved from the obligation to make payment of expenditure previously allowed as a deduction (s 8(4)(m)).8.3 Depreciable regime
8.3.1 Tangibles (movable and immovable assets, for example plant and machinery)
1. Ordinary wear and tear ; s 11(e)The period over which a capital asset may be write off for tax purposes, is within the Commissioner's discretion. In this regard two Practice Notes, No 15 and 19, have been issued to indicate the time period that will be allowed in respect of different assets.
2. Machinery and plant: (s 12C).Plant, machinery, implements, utensils and other articles used for the purposes of trade is usually deductible in equal instalments over a period of 5 years.
3. Manufacturing building allowance (s 13)
Buildings used wholly and exclusively for carrying on a process of manufacturing or a similar process (excluding mining and farming) qualifies for an annual building allowance.
4. Allowance for hotel buildings and improvements (s 13bis). An annual allowance on the cost of the portion of buildings or improvements used by a taxpayer or lessee for the purposes of trade as a hotel keeper is available.
5. Allowance for aircraft hangars, aprons, runways and taxiways (s 12F)
A 5% annual allowance is available on the cost of constructing, erecting or installing:
The allowance is only available in respect of agreements:
6. Allowance for pipelines, transmission lines and railway lines (s 12D)
An annual allowance of either 5% or 10% is available for the cost actually incurred on the acquisition of certain pipelines, transmission line and railway lines.
To qualify for the allowance the assets need to be:
transportation of persons, goods, things or natural oil or the transmission of electricity or any
telecommunication signal.
7. Residential building allowance (s 13ter)
Both a residential building initial allowance and a residential building annual allowance is available to a taxpayer who erects qualifying residential units.
The initial allowance amounts to 10% of the costs to the taxpayer of certain specified residential units and the annual allowance to 2%.
8.3.2 Intangibles/incorporeals (for example, copyright, patents, goodwill and other intellectual rights)
Expenditure incurred on the development, acquisition and renewal of most incorporeal rights are deductible. However, a deduction of expenditure incurred on the acquisition of trademarks or similar property incurred after 29 October 1999 is expressly prohibited. The prohibition is limited to the acquisition of trademarks and does not apply to expenditure incurred on the creation, production or registration of trademarks.An allowance for expenditure incurred after 29 October 1999 may be claimed equal to:
8.4 Treatment of losses
Losses may be carried forward by corporate taxpayers provided that:Losses incurred on a trade conduced by a taxpayer outside SA cannot be deducted against income derived from carrying on a trade within SA.
9. Foreign Exchange Losses and Gains
Companies have to account for income tax purposes for all their foreign exchange gains and losses (referred to as “exchange differences”) irrespective of whether they are of a capital nature.Exchange differences can only arise on an exchange item, which is defined as an amount of foreign currency:Taxpayers have to account for exchange difference arising between:
The ruling exchange rates used to quantify the exchange differences are prescribed and differ for each exchange item and each date.
10. Branch Profits Tax
Domestic branches are not taxed separately.However, the provisions of a double tax agreement may provide otherwise.
Branches of foreign companies are tax in South Africa at a flat rate of 33%. Again, the provisions of a double tax agreement may provide otherwise.
11. Group Taxation/Consolidated Returns
No group taxation.12. Presumptive Tax Measures (for example, a minimum tax in the form of a gross asset tax)
No presumptive tax.13. Rates
Companies, other than gold mining companies, companies mining for oil and gas, employment companies and small business corporations pay tax on their taxable incomes at a flat rate of 28%. In addition Secondary Tax on Companies (STC) is imposed at a flat of 10% (see E.2). Non-resident companies, carrying on a trade through a branch or agency within South Africa, are taxed at a flat rate of 33% on income derived from such branch or agency.
These companies are exempt from STC in respect of dividends declared out of profits derived through the branch or agency.A small business corporation that earns a gross income of no more than R1 million is taxed at 15% on the first R100 000 of taxable income and only thereafter at the normal corporate rate of 30% for every R1 in excess of R100 000.
14. Rebates
None.15. Withholding Taxes
Withholding tax on certain royalties (s 35, see E 3) at the rate of 12%.
Witholding tax on foreign sportsperson and entertainers at the rate of 15% on gross payments
Withoding tax on on payments for fixed propoerty acquired from a non-resident at the following rates:
- 5% in the case of individuals
- 7,5% in the case of companies
- 10% in the case of trusts
16. Beneficiaries of Revenue
National government.C. Income Tax on Individuals (National Government)
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
Income Tax, Income Tax Act 58 of 1962 (hereinafter referred to a “the Act”).2. Department Responsible for Administration
South African Revenue Services.3. Definition and Classification
As the term ;individual; is not defined in the Act it takes its ordinary meaning.
Under SA law a partnership does not have a separate legal existence, but taxes is levied on the individual partners.
Special trusts are treated as individuals. A special trust is a trust created solely for the benefit of a person who suffers from:
4. Time Tax is Levied
Tax is levied on the earlier of the date an amount is received or it accrues (hereinafter referred to as “derived”). The term “accrued to” had been interpreted by the Courts as the date on which a person becomes unconditionally entitled to an amount.5. Basis of Taxation
5.1 Source-based or residence based
The taxation of individuals is residence based. individuals who are not resident in SA are taxed on income derived from sources or deemed sources in SA.
5.2 If source, define:
The word "source" is not defined in the Act.
5.2.1 Actual source
In terms of common law, the enquiry as to the meaning of the word "source" is to determine the originating cause for the receipt or accrual of the amount and determining the geograhical location of the originating cause. Therefore, the originating cause is the activities of the taxpayer or the employment of his/her capital or assets. If the activities of the taxpayer are carried on or his/her capital or assets are employed in SA, the receipts or accruals derived from thoseactivities or the employment of capital or assets will be sourced in SA.
5.2.2 Deemed source
There are certain deemed source rules in the Act (i.e. section 9). These are amounts received or accrued to or in favour of a person by virtue of:
- royalties received or accrued to a person by virtue of use or the rightto use or the grant of permission to use intellectual property in SA;
- disposal of minerals extracted in SA or the carrying on of operations regulated by SA laws regarding mineral deposits
- services rendered or work done in any place if such work is at least 80% funded by the SA national, provincialor local government ("the government") budget and carried out on a contract basis with the SA government OR holdingof public office by a person appointed or deemed to be appointed in terms of an Act of Parliament (even where the public office is held outside the Republic
- pension or gratuity granted by the Government, any provincial administration or by any SA municipalityunder certain instances
- judicial order or written agreement of separation or an order of divorce under certain circumstances.
Capital gain or loss from disposal of assets where (subject to certain provisions):
- in the case of immovable property, where that propoerty is situated in SA
- in the case of any other asset, that asset is attributable to a permanent establishment situated in SA and the proceeds from the disposal of that assetare not subject to tax in any other country.
Interest derived from the utilisation or application in SA of any funds or credit obtained in terms of any interst bearing arrangement. In this regard, the place of utlisation of the funds will be deemed to be in SA if the person (individual) is ordinarily resident in the Republic or that person (other than an individual) has its permanent establishment in SA.
4.3 If residence, define:
5.3 If residence,
5.3.1 Define resident
In the case of an individual two tests apply in order to determine whether or not he/she is a resident of South Africa.
The first test is to determine whether the individual is ordinarily resident in South Africa. If so, he/she is a resident. The courts have interpreted the term 'ordinarily resident' to mean the country to which an individual would naturally return from his/her wanderings. It might therefore be called an individual's usual or principal residence and it would be described more aptly, in comparison to other countries, as the individual's real home.
The second test , the so-called physical present test, applies to an individual who is not considered ordinarily resident in SA. In terms of this test an individual becomes a resident of SA if thatindividuals isphysically present in SA for a period(s) exceeding -
5.3.2 Exclusions from the definition of resident:
A person deemed tobe exclusively a resident of another country for purposes of the application of a DTA enteredinto between SA and that other country.5.3.3 Ceasing of residency provided for in the Act
Where an individual who is resident as a result of the physical presence test is absent from South Africa for a continuous period exceeding 330 days, that individual will be regarded as being non-resident from the date that he/she ceased to be physically present.
6. Included in Tax Base
World-wide income.7. Year of Assessment
The year of assessment for individuals covers a period of 12 months and generally commences on 1 March of a specific year and ends on the last day of February the following year.8. Computation of Taxable Income
8.1 Exemptions (do not only indicate the heading, but provide a brief explanation)
8.1.1 Partial exemptions (amounts exempt irrespective of the identity of the recipient):
In addition to the exemptions applicable to corporate taxpayers (see B. 8.1.1), the following exemptions apply to individuals:An exemption exists in respect of benefits that arise from an employer bearing expenditure incurred on relocating an employee.
Certain retirement awards as do not exceed R30 000 are exempt from tax.
Benefits arising from a so-called “stop-loss”-provision under a share incentive scheme operated for the benefit of employees are exempt from tax. Benefits excluded are those derived upon:
- the repurchase from the taxpayer of shares bought by him under the scheme, provided that the repurchase price does not exceed the selling price.
This exemption does not apply to any other income, such as interest or rentals that the resident may earn during these periods.
Employment: Amounts received by non SA-resident employee (s 10(1)(e));
Amounts derived by:
- Any person who is not an SA resident;
- for services rendered by him or her outside the Republic;
- for or on behalf of a qualifying employer in the national or provincial sphere of government of local authority in SA or similar qualifying entitiesare exempt from tax.
The first R4 000 of interest and dividends in aggregate that are not otherwise exempt from tax derived by a natural person is exempt from tax. For natural persons older than 65 years of age, the exempt is increased to R5 000.
Interest derived by a non SA-resident individual is exempt from tax provided that he or she:
- Does not at any time of the year carry on business in SA; and
- was physically absent from SA for a period of at least 183 days in aggregate during the year of assessment.
- A person who holds an office in SA as an official of any government other than the SA government, provided that he or she is stationed in SA for official purposes and is not ordinarily resident in SA;
- a domestic or private servant of the former;
- a subject of a foreign state who is temporarily employed in SA, provided that the exemption is authorised by an agreement entered into between the two States;
Unemployment benefits payable under the Unemployment Insurance Act 63 of 2001 are exempt from tax.
The value of a special uniform given to an employee or an allowance given in lieu of the uniform is exempt from tax provided certain conditions are complied with.
The following pensions are exempt from tax:
Amounts derived by a resident form the social security system of another country are exempt from tax. Also exempt is pensions derived by a resident from a source outside SA in consideration of past employment outside SA, provided the amount is not deemed to be from an SA source.
8.1.2 Absolute exemptions (taxpayers enjoying completed exemption from tax on income)
Same as for corporate taxpayers.8.2 Deductions and recoupments
8.2.1 Allowable deductions
General deductions:Same as for corporate taxpayers.
Special deductions:
Except for some minor differences, individuals are entitled to the same deductions as bodies corporate. In addition they may claim the following deductions:
Entertainment expenditure actually incurred during a year of assessment by a natural person is deductible.The deduction is limited to the lessor of:
- R2 500; or
- R300 plus 5% of the taxpayer's taxable income (from trade in respect of which the expenditure was incurred) as exceeds R 6000.
Medical expenses paid by the taxpayer (other than amounts recoverable from medical schemes) may be claimed in respect of the taxpayer, the taxpayer's spouse and his/her children.
A person who is 65 years and older may claim all allowable expenses, in other words, an unlimited deduction.
There are two limits for persons under 65 years, namely -
- A taxpayer with no handicapped family member may claim all allowable expenses which exceed the greater of R1 000 or 5% of taxable income before determining the deduction for medical expenses.
A taxpayer with a handicapped family member may claim any expenditure necessarily incurred and paid by the taxpayer in consequence of any physical disability (handicap) suffered by the taxpayer, his/her spouse or child in excess of R500 per year of assessment.
A handicapped person means -
- A blind person as contemplated in the Blind Persons Act ;
- A deaf person, whose hearing is impaired to such an extent that he/she cannot use it as a primary means of communication;
- A person who requires a wheelchair, calliper or crutch permanently;
- A person who requires an artificial limb; or
- A person who suffers from a mental illness as defined in section 1 of the Mental Health Act.
For the purposes of medical expenses, a child means a child or stepchild who was alive during any portion of the year of assessment and who was unmarried on the last day of the year of assessment and was -
8.2.2 Valuation of inventory/trading stock
Same as for bodies corporate.8.2.3 Reserves and provisions
Same as for bodies corporate.8.2.4 Non-deductible expenses
In addition to expenses which may not be deductible by corporations (see B 8.2.4), the following limitations exists on deductions claimed by individuals:1. Private maintenance expenses (s 23(a));
Expenditure incurred on the maintenance of the taxpayer, his family or establishment is not deductible.
2. Domestic or private expenses (s 23(b));
Domestic expenditure, including the rent of or cost of repairs or expenses in connection with premises not occupied for the purposes of trade or of any dwelling-house or domestic premises is not deductible, except to the extent that it is occupied for the purposes of trade.
The effect of this exception is that where an individual uses part of his/her domestic premises for the purposes of earning trade income, he/she will be able to deduct some of the expenses incurred in respect of the property. This will only be the case where that part is specifically equipped for purposes of the taxpayer's trade and is regularly and exclusively used for those purposes. The portion of the expenses that may be deducted will usually be based on the floor space of the portion that is occupied for the purposes of trade, in relation to the total floor space of the dwelling or other domestic premises. This proportion of the following types of expenditure will therefore be deductible from the income derived from trade:
- Rent, or interest payments on a mortgage bond over the property owned by a person (but not the capital repayments as these are of a capital nature);
- Repairs and maintenance expenditure, such as cleaning expenses;
- Water, electricity and property rates.
An employee may not deduct expenditure on the basis above unless he/she works mainly from his/her domestic premises.
3. Entertainment expenditure (s 23(I))
As a general rule entertainment expenditure incurred by a taxpayer relating to employment or an office held by him for which he derives remuneration, is not deductible.
However, a limited deduction is available in certain circumstances (see C 8.2.1). The general rule is also not applicable to expenditure claimed under the general deduction formula (see B 8.2.1) incurred by an agent or representative whose remuneration is normally derived wholly or mainly in the form of commissions based on sales or turnover.
8.2.5 Recoupments
Same as for corporate taxpayers.8.3 Depreciable regime
8.3.1 Tangibles (movable and immovable assets, for example plant and machinery)
Same as for corporate taxpayers.8.3.2 Intangibles/incorporeals (for example, copyright, patents, goodwill and other intellectual rights)
Same as for corporate taxpayers.8.4 Treatment of losses
Assessed losses may be carried forward, irrespective of whether the individual conducted a trade in the subsequent year or if income was derived in that year.9. Foreign Exchange Losses and Gains
The income tax treatment of exchange items held by natural person as trading stock is the same as for corporate taxpayers.Exchange items held by natural persons on capital account are to be dealt with under Regulations that will be published in terms of the provisions of paragraph 84 of the Eighth Schedule. Although the contents of the Regulations have not yet been finalised, it is expected that the exchange difference will be recognised only on disposal of the exchange item.10. Rates
TAX RATES
PERSONS (OTHER THAN COMPANIES)
Taxable income (R) Rates of tax
0 - 122 000 = 18% of each R1
122 001 - 195 000 = 21 960 plus 25% of amount above 122 000
195 001 - 270 000 = 40 210 plus 30% of amount above 195 000
270 001 - 380 000 = 62 710 plus 35% of amount above 270 000
380 001 - 490 000 = 101 210 plus 38% of amount above 380 000
490 001 + = 143 010 plus 40% of amount above 490 000
11. Rebates/Tax Threshold
Primary R 8 280
Secondary R 5 040
12. Fringe Benefit Taxes (Benefits Flowing from an Employer-Employee or an Office Relationship)
Any payment received in respect of employment is included in an employee's gross income in terms of the definition of 'gross income'. However, certain benefits flowing from employment are not paid in cash and under the Seventh Schedule to the Act a 'cash equivalent' of these 'benefits in kind' needs to be determined. Any contribution made by an employee will reduce the amount so determined in respect of the benefit.Where the benefit is an amount paid to or for the benefit of an employee, such amount is included in the remuneration of the employee. The deemed value of other benefits, such as company owned residential accommodation or the use of a company car, are calculated by way of formulae.
Specific provisions prescribe the calculation of the value that must be placed upon each benefit that accrues to an employee. The Commissioner uses market value for some types of fringe benefits and cost price for others.Benefits that constitute taxable fringe benefits are:
A taxable benefit arises when whenever an employee is granted the use of an asset either free of charge or for a consideration which is lower than the value of the use.
The value of a company vehicle made available to an employee is included in gross income as a fringe benefit. It is calculated at 1,8% per month of the determined value. Where the employee bears the cost of all fuel used for the purposes of private travel (including travelling between the employee's place of residence and his/her place of employment) the deemed monthly value is reduced by an amount of R120. If the employee bears the full cost of maintaining the vehicle (including the cost of repairs, servicing, lubrication and tyres) the deemed monthly value is reduced by an amount of R85.
A taxable benefit arises when an employee has been provided with a meal or refreshments or voucher entitling him or her to a meal or refreshment for free of for a consideration which is lower than the value of the benefit.
This includes normal residential accommodation as well as holiday accommodation. The benefit arises when the employee has been provided with residential accommodation whether furnished or unfurnished; with or without meals; and with or without power and water.Any residential accommodation supplied by the employer as a benefit or advantage or as a reward for services rendered (or to be rendered) is valued either -
• At the cost borne by the employer less any amount paid by the employee, or
• By utilising the formula (in essence the value determined by using the formula amounts to apercentage of remuneration) provided in the Seventh Schedule to the Act.
The valuation based on the cost to the employer will not apply where -
• It is customary for an employer to provide free or subsidised accommodation to its employees;
• It is necessary for the particular employer, having regard to the kind of employment, to provide free or subsidised accommodation -
• It is necessary for the particular employer, having regard to the kind of employment, to provide free or subsidised accommodation -
- For the proper performance of the duties of the employee;
- As a result of the frequent movement of employees; or- Due to lack of employer-owned accommodation; and
- The benefit is provided for the bona fide business purpose other than obtaining a tax advantage
Where any service has, at the expense of the employer, been rendered to an employee for his private use, the service is treated as a fringe benefit. The provision is applicable where the services are either rendered by the employer or by another person.
The difference between interest charged at the official rate (13% from 1 March 2001 to 30 September 2001; 10,5% from 1 October 2001 to 28 February 2002) and the actual amount of interest charged is to be included in gross income.
A taxable benefit arises whenever an employer has paid a subsidy in respect of capital or interest on a loan. The provision is applicable in the situation where the employer pays a lender a subsidy in respect of a loan to the employee. If the amount paid by the employer together with the interest paid by the employee exceeds an amount determined by using the official interest rate (applied to the loan) the full amount paid by the employer is treated as a taxable subsidy. If the amount paid by the employer together with the interest paid by the employer is less than the official rate the loan is treated as a low interest loan.
A taxable benefit arises, when:
- the employer has paid an amount owing by the employee to a third party without requiring the employee to reimburse him or her;
- the employer has released the employee from an obligation to pay an amount owing by the employee to the employer.
From 1 April 1998 a fringe benefit arises when an employer has directly or indirectly made a contribution or payment to any medical aid scheme registered under the provisions of the Medical Schemes Act 72 of 1967, for the benefit of the employee, if the contribution exceeds two thirds of the total contribution (in relation to the employee) to the fund.
13. Allowances
Allowances are generally paid to employees to meet expenditure incurred on behalf of an employer. The unexpended portion of such an allowance must be included in the employee's taxable income. The most common types of allowances are travelling, subsistence and entertainment allowances.Motor vehicle travelling allowances are taxable but expenses for business travel may be set-off against the allowance received. Travel between home and a place of business is regarded as private travel and is not considered to be business travel.
Business expenses may be claimed by submitting acceptable records and proof of actual costs, or by using the tables provided by SARS. The tables make provision for a fixed, fuel and maintenance cost per kilometre. If no record of actual kilometres travelled is kept, the first 14 000 km are regarded as private travel. No more than 18 000 km may be claimed for business purposes where no records are kept. If the vehicle has been used for a period of less than 12 months during the year, these distances are reduced proportionately.
Where the employee interchangeably uses more than one vehicle for business purposes and one or more of such vehicles were not primarily used for business purposes, the provisions pertaining to the 14 000 km deemed private kilometres and 32 000km apply separately to each vehicle. In order to prove that any vehicle was primarily used for business purposes, the taxpayer will have to keep an accurate record of the total distance travelled for business purposes.
In respect of any second (or further) vehicle(s) made available to such employee or his family, and the vehicle is not used primarily for business purposes, the benefit is 1,8% per month on the value of the vehicle with the highest value and 4% per month on the other vehicles(s).
The 'determined value' generally excludes finance charges, interest and value added tax or sales tax.
A subsistence allowance is normally paid to employees to enable them to meet expenses incurred in respect of accommodation and meals when away on business from their normal place of residence. If an employee is required to spend at least one night away from his/her usual place of residence and bears the cost of accommodation, an amount not exceeding R150 per day or part thereof is allowed as an expense. Where the employer bears the cost of accommodation, R65 per day is allowed.
Where the allowance exceeds this amount, the full amount of the allowance must be included in the employee's income and actual expenses incurred must be claimed against such allowance.
14. Treatment of Pension, Provident or Retirement Annuity Fund Income
Annuities received from these funds are taxed as ordinary income. The capital portion of a purchased annuity is exempt from tax (see B. 8.1.1).Lump-sum benefits derived from these funds are taxable, subject a certain portion being tax free (Second Schedule to the Act).
An employee may claim the following deductions ( 11(k)):
(i) Current pension fund contributions
A deduction is limited to the greater of -
• 7,5% of the remuneration received during the year from retirement-funding employment; or
• R1 750.
Retirement-funding employment is the portion of the remuneration that is used to calculate the contributions to a pension or provident fund.
Any excess may not be carried forward to the following year of assessment.
(ii) Arrear contributions
These are the amounts paid in respect of past periods taken into account as pensionable service.
A maximum allowance of R1 800 per year is allowed. Any excess over R1 800 may be carried forward to the following year of assessment.
(i) Current contributionsAn amount which does not exceed the greater of -
• 15% of taxable income derived from non-retirement funding employment is deductible. Non-retirement funding employment is income earned where no pension or provident fund deductions are made; or
• R3 500 less allowable current pension fund contributions; or
• R1 750.
(ii) Arrear contributions
A maximum of R1 800 per year may be claimed. Any excess over R1 800 may be carried forward to the following year of assessment.For a discussion of deductions employers may claim, see B 8.2.1.
15. Treatment of Professional Income
No special treatment, forms part of gross income.16. Treatment of Investment Income
Except for a limited annual exemption for interest (see C. 8.1.1), treated as ordinary income.17. Withholding Taxes
Similar as for corporate taxpayers.18. Beneficiary of Revenue
National government.D. Income Tax on Non-Residents (National Government)
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
Income Tax, Income Tax Act 58 of 1962.2. Department Responsible for Administration
South African Revenue Services.3. Included in Tax Base
SA sourced income.4. If Sourced-Based, Define (If Not Already Done)
4.1 Actual source
The Act itself contains no definition of the term “source”. To determine the source of an amount the Courts apply a two-legged test, namely:(a) the originating cause of the amount; and
(b) the geographical cause for the amount.
The originating course can either be the business (activities) of the taxpayer or the employment of capital, assets or funds or both. The source is located in the country where these activities are carried out or where the capital is employed.
4.2 Deemed source:
The following amounts are deemed to be derived from a SA source:- amounts derived for services rendered or work or labour done by a person for and on behalf of an employer in the national or provincial sphere of government or any local authority in SA or a national or provincial public entity if not less than 80% of the expenditure of such entity is defrayed directly or indirectly from funds voted from parliament (s 9(1)(e)(I));
- amounts derived from the holding of an office to which a person has been appointed in terms of an Act of parliament (s 9(1)(e)(ii);
- amounts derived under a contract made for the disposal of minerals won in the course of mining operations carried on under mining authorisation granted under the Minerals Act 50 of 1991 (s 9(1)(cA));
- pensions and annuities granted by the Government or a provincial administration or local authority in SA (s 9(1)(g)(I;
- amounts derived by virtue of any pension or annuity for services performed in SA for at least two years during the last ten years immediately preceding the date on which the pension or annuity first become due (s 9(1)(g)(ii));
- certain amounts derived by a person by virtue of a judicial order or written agreement of separation or an order of divorce (s 9(1)(h)); and
- interest, finance charges, discounts or premiums derived on a financial arrangement from the utilisation or application in SA by a person of any funds or credit obtained under an interest-bearing arrangement (s 9(6)).
5. Rates
Same rates as for SA-resident taxpayers.6. Beneficiary of Revenue
National GovernmentE. Income Tax: Treatment of Dividends, Interest, Royalties and Fees
1. Dividends
Domestic dividends are generally exempt from tax (s 10(1)(k)). Except for a few exemptions, foreign dividends (as defined) are taxable (s 9E).
The term dividend is widely defined in s 1 to include all amounts distributed by a company (as defined) to its shareholders (as defined). Specifically included in the definition is:
Foreign dividends are defined as dividends received by or accrued to a person from any company, which is either a controlled foreign entity (see H.3) or which is a resident to the extent that the dividend is declared from profits derived by the company before it became a SA resident.
Although domestic dividends are exempt from tax, a secondary tax is imposed on companies distributing dividends out of their after-tax profits, referred to as STC. As STC is computed separately a company may pay STC even if the company has an assessed loss for normal tax purposes.
STC is imposed at a rate of 10% on the net amount of a dividend declared on or after 14 March 1996. In broad terms the net amount is the excess of the dividend declared over the dividends accrued to the company during a dividend cycle. When the amount of dividends accrued exceeds the dividend declared, the difference are carried forward and deducted in the succeeding dividend cycle.
2. Interest
The Act does not contain a definition of the term “interest” for general purposes.The date on which interest accrues and on which interest expenditure is incurred is specifically regulated under the Income Tax Act. Under s 24J interest (as defined for the purposes of the section) on interest-bearing arrangements is treated as though it accrued or is incurred from day-to-day on the compounded accrual basis for both the issuer and the investor, irrespective of the fact that it may be payable on a certain date.
The first R4 000 of interest and dividends in aggregation that are not otherwise exempt from tax derived by a natural person is exempt from tax (s 10(1)((I)(xv)). For taxpayers older than 65 years of age, the exemption is increased to R5 000.
Interest derived by non-residents is generally exempt from tax. The exemption applies to interest derived by a non SA resident company from:
the stock or securities has or have been acquired outside SA and paid for in the currency of a country other than SA.
Other types of interest derived by non SA-resident companies are also exempt provided that the interest is not effectively connected with a business carried on in SA ((s 10(1)(hA)). In the event of the recipient of the interest being a natural person, the interest will only be exempt if that person did not carry on a business in SA during the year of assessment in which the interest was derived and if he or she was out of the country for an aggregate period of 183 days during this period.
Although pre-production interest is not deductible under the general deduction formula (see B 8.2.1) its deductibility is specifically provided for under s 11(bA). A similar deduction exists for finance charges incurred on the acquisition of certain assets (s 11(bB)).
3. Royalties
Royalties and similar payments derived by a non SA-resident taxpayer are subject to a withholding tax.The withholding tax applies to amounts that accrue by virtue of:
- the use of the right of use, or the granting of permission to use, in SA, any patent, design, trade mark, copyright as defined in the relevant SA statutes, or any model, pattern, plan, formula or process of any other property or right of similar nature; or
- the use or right to use, or the granting of permission to use, in SA, any motion picture film, film or video tape or disc for use in connection with television, or any connected sound- recording or advertising matter
irrespective of wherever the property has been produced or made, the right of use or permission has been granted, payment for the use, right of use or grant of permission has been or is to be made and whether payment has been or is to be made by a person resident in or outside SA; or
wherever the knowledge or information has been obtained or has been or is to be imparted or the assistance or service has or is to be rendered or the undertaking a has been given, and whether payment has been made or is to be made by a person resident in or outside the Republic.
The withholding tax does not apply to amounts derived by:
The withholding tax is calculated at 12% of the gross royalty and is regarded as a final tax made on behalf of a non SA resident. The withholding tax will not be levied if the provision of a double tax agreement, provides otherwise.
4. Fees
Fees derived by SA resident taxpayers are treated as ordinary income.Non SA-residents who derive fees will be taxed in SA if the fees are considered to be from a SA source (see D 4). According to the Courts the source of fees is usually the country in which the services in respect of which the fees are paid are rendered.No withholding tax is imposed on fees paid to non SA-resident taxpayers. However, the amount may be subject to employees' tax (see C1).5. Rents
The Act does not contain a definition of the term “rent”. Rent derived by SA resident taxpayers are treated as ordinary income.Non SA-residents who derive rent will be taxed in SA if the rent is considered to be from a SA source (see D 4). According to the Courts the source of rent is the country in which the immovable property is situated or the country in which the taxpayer conducts business.F. Income Tax: Specific Industries
1. Mining Tax
The term “mining” is defined in the Act to include any method or process by which minerals, including natural oil, is won from the soil or from any constituent of the soil.Companies whose sole or principal business is mining for gold or diamonds are recognised as public companies and as a result are exempt from donations' tax (ss 38(g) and 56(1)(n))
Subject to a few specific provisions, income derived from mining is taxed under the general provisions of the Act.
The first special provision relates to capital expenditure. Capital expenditure (as defined in s 36) is generally deductible in the year it is actually incurred, subject to certain limitations. Firstly, the expenditure can only be deducted against income derived from mining operations. The result is that if none of the taxpayer's mining activities has reached the stage of production, no capital expenditure is deductible. Capital expenditure incurred has to be accumulated from year to year until production commences and income from mining operations is derived. Secondly, capital expenditure incurred must be calculated separately for each mine and deducted against income derived from that mine. Thirdly, the deduction of the aggregate of capital expenditure in a particular year of assessment in relation to any mine or mines is limited to the “gross mining taxable income”. Gross mining taxable income is defined as the taxable income derived by a taxpayer from mining:
Any excess has to be carried forward to be off set in the next year of assessment.
Fourthly, the aggregate of capital expenditure in a particular year of assessment in relation to any particular mine is limited to the “gross mining taxable income” derived by the taxpayer from that particular mine. “Gross mining taxable income” is defined for these purposes as income derived by the taxpayer from mining:
For the purposes of the last-mentioned cap, where a taxpayer carried on mining operations on 5 December 1984 on two or more mines, all those mines are considered to be one mine. Consequently, in such cases, the deduction of capital expenditure is not calculated on a per-mine basis, and is only limited by the taxable income of all the mines concerned. In addition the Minister of Finance, in consultation with the Minister of Mineral and Energy Affairs, having regard to any relevant fiscal, financial or technical implications may also direct that the last-mentioned cap does not apply (s 36(7F). Relief is also available to mines on which mining activities or related operations commenced by the taxpayer after 14 March 1990. The relief is available when capital expenditure is disallowed due to the existence of a particular cap. It consists of a deduction of the disallowed expenditure, subject to a further 25% cap (s 36(7G).
The second special provision relates to capital recoupments. In essence it is provided that recoupments of capital expenditure by a mine will reduce the capital expenditure incurred during the year in which the income is derived. Any “excess recoupments” of capital expenditure are included in gross income and taxed at the same rate as other mining income. However, in the case of gold mining companies, excess recoupments are taxed at a rate equal to the higher of 30% or the average rate of gold mining tax paid by the mine since its inception.
The third special provision deals with expenditure incurred on prospecting and related operations. Although such expenditure is usually of a capital nature, it is deductible against income derived from mining operations (s 15(b)), or is capitalised to rank for deduction against income derived from future mining operations. Where the company is not involved in mining operations, prospecting expenditure is only deductible if it qualifies for deduction under the general deduction formula (see B 8.2.1). For example, a prospecting company which conducts prospecting activities with a view to disposing of its results, will be taxed on the proceeds from such disposals, but will be entitled to a deduction of all prospecting expenditure incurred.
The fourth special provision provides that persons who are required by law to rehabilitate land relating to mining operations may form a separate tax-exempt company or entity and may make tax-deductible contributions to it, subject to certain requirements (ss 10(1)(cH) and 11 (hA)).
Lastly, special provisions apply when mining property is transferred, leased or ceded. In such circumstances the new owner is entitled to a deduction of the effective value of the property. The effective value is determined by the Director-General for Minerals and Energy. The same value is taken into account for the purposes of the recoupment discussed under the third special provision above.
Persons other than companies carrying on mining activities and companies carrying on mining activities other than gold mining are subject to the same tax rates as other taxpayers. Special formula based tax rates apply to companies carrying on gold mining activities, the particular formula being determined by whether the gold mining company has exercised an election to be exempt from the payment of Secondary Tax on Companies (see E1).
Companies deriving taxable income from mining for natural oil are subject to normal tax at the rate of 30% on taxable income arising form oil mining, plus additional normal tax amounting to 40% of the amount remaining after the deduction of normal tax from taxable income. Both the normal tax and the additional normal tax chargeable may be reduced by an amount determined by the Minister of Minerals and Energy, with the concurrence of the Minister of Finance.
2. Insurance Business
(a) Short-term insurance business (s 28)
The ordinary rules for the determination of taxable income apply to a short-term insurer. Short-term insurers are allowed to deduct certain allowances, subject to the discretion of the Commissioner, in respect of unexpired risks, claims intimated but not paid and claims not intimated nor paid.
Allowances claimed as a deduction in the preceding year of assessment must be included as income in the succeeding year of assessment.
(b) Long-term insurance business (s 29A)
The taxation of long-term insurance companies is based on the trustee principle and the recognition that insurers hold and administer certain of their assets on behalf of various categories of policyholders, while the balance of the assets represents the shareholders' interests.
These companies are liable for normal income tax according to the four-fund approach. The application of this approach requires that insurers allocate their assets to separate funds representative of the various policyholders. Each fund is taxed as a separate entity in accordance with the applicable taxation principles.
3. Farming
Farming operations may include livestock farming, crop farming, milk production, plantation farming, sugar cane farming and game farming.Persons carrying on farming operations are required to account for the value of livestock and produce on hand at the beginning and end of a year of assessment in their tax returns.
As difficulties are encountered in determining the actual number of game livestock at any given time game is excluded from opening and closing stock.
Game farmers must prove that the game is purchased, sold and bred on a regular basis in order to qualify as farmers. Income relating to accommodation and catering facilities for visitors does not qualify as income from farming operations and separate financial statements must be drawn up for such income.
(a) Special concessions for farmers –
The deduction of capital expenditure, such as the development of and improvements to farming property, is permitted in the determination of taxable income. This deduction may not exceed the farmer's taxable income from farming operations in respect of that year. If the amount of such expenditure exceeds the income in that year, the balance will be carried forward and deducted in the succeeding year, subject to the same limitation.
The cost of farming equipment, including machinery and implements, used by a farmer in farming operations is written off at the following rates –
(b) Special rates of tax for farmers –
Since a farmer's income can fluctuate considerably from year to year, the Act contains provisions whereby the farmer is afforded the option of having his rate of normal income tax averaged in the current and previous four year of assessments.
Concessions on tax rates are also made to farmers whose income for any year includes income derived from –
4. Ships and Aircraft Owners
Income derived by a resident ship or aircraft owner or charterer is taxable in South Africa.Apart from taxable income derived from other sources, a non-resident ship or aircraft owner or charterer is deemed to have derived taxable income from embarking passengers, or loading livestock, mail or goods equal to 10% of the amount payable to him/her or an agent on his/her behalf, no matter whether the amount is payable in or outside of South Africa. Such ship or aircraft owner or charterer will be assessed accordingly. However, this will not apply if the ship or aircraft owner or charterer renders accounts that satisfactorily disclose the taxable income derived from the business.
5. Other
G. Income Tax: Administrative Procedures (National Government)
1. Payment Periods
Income tax returns are issued annually to registered taxpayers after the end of each year of assessment.Tax returns must be submitted to SARS within 60 days from the end of the year of assessment or the date of the returns' issue. A taxpayer may apply for extension for the rendering of a tax return.
From the information furnished in the tax return submitted, SARS raises an assessment showing the tax due or refundable, as the case may be, for that year of assessment.
During the year of assessment a pay-as-you-earn (PAYE) deduction-system of collecting taxes operates for employees. Taxpayers earning income not subject to PAYE are required to make provisional tax payments (see below).
In addition to PAYE, there is standard income tax on employees (SITE), which is a final deduction tax. The system ensures that an employee's tax liability on specified remuneration not exceeding R60 000 is finally determined by SITE deductions, the object being to eliminate the need for tax returns for SITE-only taxpayers. SITE applies to net remuneration from employment of R60 000 or less per tax year, any excess being subject to PAYE. SITE deductions are not refundable, except in a few limited cases.
Taxpayers who are not subject to employees' tax are provisional taxpayers. Provisional taxpayers have to make compulsory tax payments every six months after the beginning of a year of assessment and at the end of the year of assessment and represent tax on income anticipated for the year of assessment.
An individual is regarded as a provisional taxpayer if -
- Income is derived from sources other than remuneration (e.g. business, farming, interest and rental income) where the taxable income from such sources exceeds R10 000 for the year of assessment;
- He/she is a director of a private company and is resident in South Africa, unless the Commissioner directs otherwise;
- He/she is a member of a close corporation and is resident in South Africa, unless the Commissioner directs otherwise;
- The Commissioner notifies the individual that he/she is a provisional taxpayer.An individual must apply to SARS for registration as a provisional taxpayer within 30 days after the date on which the individual became a provisional taxpayer for the first time.
If the individual is 65 years and older and his/her taxable income for the year does not exceed R80 000 he/she is exempt from making provisional tax payments. This concession does not apply where the individual -
- Is a director of a private company or a member of a close corporation;
- Derives income from carrying on any business; or
- Derives income otherwise than from remuneration, pension, interest, building society, dividends or rental from letting of fixed property.
The above concession applies only to provisional tax. An individual over 65 years may still be liable for income tax if net remuneration plus other income for the year exceeds R42 640.
Provisional taxpayers with taxable income exceeding R50 000 may make a third voluntary provisional tax payment (often called the 'topping up' payment). This is to enable the taxpayer to pay the difference between PAYE and provisional tax paid for the year and the full tax liability for that particular year of assessment. This payment must be made within 7 months after the end of the year of assessment if the year-end falls on the last day ofFebruary. If the year of assessment ends on another date, the taxpayer is required to settle the total income tax liability within six moths after the year-end. Failure to do so my result in interest being levied on any underpayment. In the case of overpayment, interest is payable to the taxpayer.
2. Rulings
2.1 Possibility of advance rulings
None2.2 Publication of rulings
None3. Codification of Revenue Practices
SARS publishes a limited number of Interpretation Notes on topical issues as well as a Handbook on its Interpretation of the Act.4. Refunds
When the Commissioner is satisfied that a taxpayer has overpaid tax, he may authorise a refund. The refund must be claimed within three years after the date of the assessment. If the taxpayer owes any other tax, the Commissioner is entitled to set off the refund against the tax owing.When a taxpayer had been assessed in accordance with a practice generally prevailing at the time, a refund may not be claimed if the practice subsequently changes.5. Interest, Charges and Penalties
Yes, on amounts payable to Revenue, but not always on amounts payable by Revenue. Penalties may be imposed up to 200% of the outstanding taxes.H. Income Tax: Anti-Avoidance Provisions (National Government)
1. Transfer Pricing Legislation
Where any goods or services are supplied or acquired under an international agreement (as defined) and:(i) less than the price which such goods or services might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm's length; or
(ii) greater than the arm's length price,the Commissioner may, in determining the taxable income of either the acquirer or the supplier, adjust the consideration for the transaction to reflect an arm's length price for goods or services.
2. Thin Capitalisation Legislation
Thin capitalisation rules had been introduced with effect from on 19 July 1995.Where a non SA-resident (the investor) grants financial assistance, whether directly or indirectly:
the Commissioner may if he believes that the value of the financial assistance is excessive in relation to the fixed capital of such connected person or recipient, then any interest, finance charge or other consideration payable for the financial assistance will, to the extent it relates to the value which is excessive, be disallowed as a deduction.
SARS practice is to a debt to equity ratio of 3:1.
Interest will be regarded as excessive and will not be tax deductible to the extent that the nominal annual interest rate exceeds:
3. Controlled Foreign Companies (CFCS)
Income derived by a CFC is attributed to a SA resident under certain circumstances.
A foreign company is defined as a any asscoation, corporation, company, arrangement orscheme contemplated in paragrph (a), (b), (c), (e) or (f) of the definition of company in section 1, which is not aresident.
A CFC is defined as a foreign company in which South African residents directly or indirectly hold more than 50% total participation rights or exercise directly or indirectly more than 50% of of its voting rights.
The South African resident controlling the CFC is taxed on a proportional amount of the net income derived by the CFC, based on the percentage of participation rights of that South African resident.
The net income of the CFC is an amount equal to the taxable income of the CFC for the foreign tax year of the CFC which ends during the year of assessement of the South African resident. The taxable income is calculated asif the CFC had been a taxapayer and a resident of South Africa during this period.
Although all income (both investments and business income) and capital gains are in principle attributed to the South African resident, certain amounts are exempt under s 9D(9). A South African resident is entitled to a credit of South African tax for foreign taxes paid by the CFC on income that is imputed to the South African resident.
A South African residentwho alone or together with any connected persons holds between10% and 20% of the participation and votng rights ina CFC, may elect not to use the exemptions from the imputation requirement. A South African resident holding between 10% and 20% of the participation and voting rights can elect that the foreign company nevertheless be trwted as a CFC. These rules provide the resident with the opportunityto utilize the foreign tax credit that otherwise would not be available.
4. Provide a Brief Discussion of General Anti-Avoidance Provisions (Both under common and statutory law)
Common law:The common law substance over form doctrine or sham transactions doctrine is regularly applied to tax planning schemes. In terms of this doctrine, a court will not give effect to the form of an agreement, but effect will be given to the substance of the agreement. The doctrine is applicable when an agreement entered into is a mere sham as the parties never intended to give effect to it.
Statutory law:
A general anti-avoidance provision is contained in s 103(1) of the Act. For the section to apply, four requirements need to be present:
5. Transactions Between Connected Persons
No general provision dealing with transactions between connected persons exists. However, certain sections contain limitations when a transaction is between connected persons.I. Capital Gains Tax on Corporations (National Government)
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
Capital Gains Tax, Income Tax Act 58 of 1962 (Eight Schedule)2. Department Responsible for Administration
South African Revenue Services3. Basis of Taxation (Source-based or residence-based)
Residence-based tax (par 2)Disposals of assets by SA-residents are subject to CGT
Disposal of the following assets by non-residents are subject to CGT:
4. Time When Tax is Levied
On disposal as defined in s 11 of the Eight Schedule. Special rules determine the time of disposal as contained in par. 13. The time of disposal of an asset is in the case of change of ownership:The time of disposal for other types of disposals (other than by change of ownership) are:
The tax is only levied on disposals taking place after 1 October 2001 (the date of introduction of CGT).
5. Included in Tax Base
All assets. The word “asset” is widely defined in par 1 of the Eight Schedule to include all property of whatever nature and rights and interest in such property.6. Exemptions/Exclusions
1. Certain Retirement benefits (par 54), namely:2. Certain long-term assurance benefits (par 55), namely:
3. Disposal by creditor of debt owned by connected person/Debt defeasance (par 56)
4. Exercise of an option (par 58)
5. Capital gains and losses derived by domestic unit trust funds (par 61)
6. Donations and bequests to public benefit organisations (par 62)
7. Gains and losses derived by persons exempt from income tax (par 63)
8. Assets used to produce income exempt from income tax (par 64)
7. Allowable Deducations
The base cost of an asset is deductible. Expenditure forming part of base cost is defined in par 20. It is in essence all expenditure incurred in respect of the asset.
For assets acquired before 1 October 2001 (“pre-valuation date assets”), the taxpayer may generally use any of the following methods:
a) 20% of the proceeds upon disposal can be deemed to be the base cost;
b) The market value of the asset on 1 October 2001 (called the valuation date), is the base cost. The valuation must be carried out before 30 September 2003;
c) The time apportionment method may be utilised to determine the base cost as follows:
Original cost + Gain x Period owned before 1/10/2001
Total period of ownership
Where there is a loss, the formula will reduce the original cost by the portion of the loss relating to the period before valuation date.
Where no records have been kept, methods (a) and (b) must be used.
8. Non-Deductible Expenses
Par 20(2)1. Borrowing cost;
o The cost of maintaining, repairing protecting and insuring the asset;
o Where the asset is immovable property, rates and taxes on that property; and
o Interest on money borrowed to finance directly the expenditure as contemplated in paras. (a) or
(e) (i.e. expenditure relating to the acquisition and improvement/ enhancement of the asset).
Provided that if the asset is a listed share, or an interest in a unit portfolio, only one third of the
expenditure can be included in the base cost.
2. Expenditure on repairs, maintenance, protection, insurance rates and taxes or similar expenditure.
3. Certain options and rights to obtain a marketable security.
Expenditure was already claimed for income tax purposes, it cannot again be claimed for CGT purposes (par. 20(3)).
9. Roll-Overs
Involuntary disposals (par 65)
Reinvestment in replacement assets (par 66)
10. Treatment of Losses
Capital losses cannot be deducted against taxable income.In addition, certain capital losses must be disregarded but any capital gains will be taxable (par 15). Capital losses on disposal of the following assets are disregarded:
11. Rates
Due to the fact that only a certain portion of the gains is included in taxable income, which is 50% in the case of corporate taxpayers, and then tax at ordinary income tax rates, 28%, the effective CGT-rate is 14%.
12. Rebates
None.13. Tax Period
Similar as for income tax.14. Withholding Taxes
None.15. Beneficiary of Revenue
National government.J. Capital Gains Tax on Individuals (National Government)
1. Name of Tax and Levied in Terms of Which Levied (Name, Number and Year)
Capital Gains Tax, Income Tax Act 58 of 1962.2. Department Responsible for Administration
South African Revenue Services.3. Basis of Taxation (Source-based or residence-based)
World-wide.4. Time When Tax is Levied
On disposal as defined in par 11.5. Included in Tax Base
Same as for bodies corporate.6. Exemptions
Same as for bodies corporate. Additional exemptions are available for natural persons:
1. The first R1.5 million capital gain or loss on the sale of a primary residence is exempt from CGT (par.
44 – 51).
2. Capital gains or losses on certain personal use assets (i.e. assets that is used mainly for purposes
other than carrying on a trade) must be disregarded (par. 53). However personal use assets do not
include:
o A coin made mainly from gold or platinum of which the market value is mainly attributable to the
material from which it is minted or cast;
o Immovable property;
o An aircraft with an empty mass exceeding 450 kilograms;
o A boat exceeding 10 metres in length;
o A financial instrument;
o Any fiduciary, usufructuary or other like interest, the value of which decreases over time;
Any right in any of the assets above.
3. Disposal of small business assets (par 57)
disposal does not exceed R5 million.
earned);
the partnership; or
company) which relates to active business assets.
§ The person must be 55 years of age or older; or
§ The disposal must be in consequence of ill health, other infirmity, superannuation or death.
4. Compensation for personal injury, illness or defamation (par 59)
5. Gains/losses from gambling, games and competition conducted under the rules of the Republic (par 60)
7. Allowable Deducations
Same as for bodies corporate.8. Non-Deductible Expenses
Same as for bodies corporate.9. Treatment of Losses
Same as for bodies corporate.10. Rates
Due to the fact that only a percentage of the gain (25%) is included in taxable income and then taxed at ordinary income tax rates, the effective rates varies between 0,5 and 10%.11. Rebates/Annual Deduction
Annual rebate/exclusion of R16 000 of capital gain or loss. An exclusion of R120 000 is allowed where a person dies during the year of assessment.
12. Tax Period
Same as period as for income tax purposes.13. Withholding Taxes
None.14. Beneficiary of Revenue
National government.K. Special Taxes (Other Than Income Tax) on Certain Industries/Types of Income
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
Tax on Retirement Funds, Tax on Retirement Funds Act 38 of 1996.2. Department Responsible for Administration
South African Revenue Services.3. Taxpayer
The person liable for tax shall be:4. Included in Tax Base
Firstly the income of the fund is determined in accordance with S 3:o The gross amount of interest
o The gross amount of rental income (excluding any expenditure relating directly to the
production of the rental income and certain capital expenditure)
o Any foreign dividends received by or accrued to the fund in accordance with s 9E of the Act.
5. Tax Rate
25% of the taxable amount as determined in ss 4 and 5.6. Beneficiary of Revenue
National GovernmentL. Taxation of Capital
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
Estate Duty, Estate Duty Act 45 of 1955.2. Department Responsible for Administration
South African Revenue Services (s 6).3. Taxpayer
In general, either the executor of the estate or the person to whom the advantage accrues.4. Included in Tax Base
An estate of a person which basically consists of all property, including deemed property (e.g. life insurance policies, payments from pension funds etc) of the deceased, wherever situated. The estate of a deceased non-resident consists only of his/her South African assets.5. Tax Rate
made from the total value of the estate. One such deduction is the value of the property in the
estate that accrues to the surviving spouse of the deceased.
of the estate (s 4A).
6. Beneficiary of Revenue
National Government.M. Donations Tax (National Government)
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
Tax on Donations, Income Tax Act 58 of 1962.2. Department Responsible for Administration
South African Revenue Services.3. Taxpayer
The donor (s 59).4. Included in Tax Base
Any gratuitous disposal property including any gratuitous waiver or renunciation of a right as per the definition of a donation in s 55.5. Tax Rate
6. Beneficiary of Revenue
National Government.N. Other (National Government) (National Government)
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
2. Department Responsible for Administration
3. Taxpayer
4. Included in Tax Base
5. Tax Rate
6. Beneficiary of Revenue
South African Revenue Service