TAXATION 388
Notes made in the 2020 academic year
All notes up to and including Test 3 contents
(Test 1 + Test 2 + Test 3)
Tax email address:
TABLE OF CONTENTS
Chapter 1 ..................................................................................................................................................... 8
GENERAL PRINCIPLES OF TAXATION...................................................................................................... 8
Introduction to taxation: ......................................................................................................................... 8
Types of taxes ............................................................................................................................................. 8
1.1 Overview: tax policy .......................................................................................................................... 9
1.2 Tax base ............................................................................................................................................. 9
How should taxes be levied? .................................................................................................................. 10
1.3 Tax rate structure ............................................................................................................................ 10
1.4 Principles of taxation ....................................................................................................................... 14
Maxims of taxation (Adam Smith) ......................................................................................................... 14
Chapter 2 ................................................................................................................................................... 15
TAXATION IN SOUTH AFRICA ................................................................................................................ 15
2.2 Taxation in South Africa .................................................................................................................. 15
2.2.1 Brief history of taxation in South Africa ....................................................................................... 15
2.2.2 The legislative process ................................................................................................................... 16
2.2.3 Current tax legislation .................................................................................................................... 17
2.3 Administration of tax legislation..................................................................................................... 18
2.4 Interpretation of tax law.................................................................................................................. 18
2.4.1 Tax Legislation................................................................................................................................. 19
2.4.2 Judicial decisions ............................................................................................................................ 19
2.4.3 Rules of Interpretation.................................................................................................................... 20
2.5 Illustrating the components of normal tax and the interpretation of tax law in South Africa..... 20
1
, 2.5.1 The incidence of normal tax (s 5) .................................................................................................. 20
2.5.2 Rate structure of normal tax .......................................................................................................... 21
2.5.3 Tax base of normal tax ................................................................................................................... 22
Broken years of assessment .................................................................................................................... 24
Chapter 3 ................................................................................................................................................... 26
GROSS INCOME ....................................................................................................................................... 26
3.1 Basic Framework to Calculate a Person’s Taxable Income........................................................... 26
The definition of ‘gross income’ [s1(1)] .................................................................................................. 26
3.2. Determine if taxpayer is resident or non-resident ....................................................................... 27
3.3 Meaning of ‘total amount in cash or otherwise’ ............................................................................ 33
3.4 Received by or accrued to .............................................................................................................. 34
3.4.1 Meaning of ‘Received by’ .............................................................................................................. 34
3.4.2 Meaning of ‘accrued to’ ................................................................................................................. 35
3.4.3 Valuation of receipt or accrual ...................................................................................................... 35
3.4.4 Unquantified Amounts ................................................................................................................... 35
3.4.7 Cessation of income ....................................................................................................................... 36
3.4.8 Time of accrual of interest payable by SARS .............................................................................. 37
3.5 Year of assessment .......................................................................................................................... 38
3.6 Receipts and accruals of a capital nature ...................................................................................... 39
3.6.1 Nature of an asset ........................................................................................................................... 40
3.6.2 Intention of a company .................................................................................................................. 40
3.6.3 Business conducted with a profit-making purpose .................................................................... 41
(3.6.4 & 3.6.5 & 3.6.7) .............................................................................................................................. 41
Mixed purpose .......................................................................................................................................... 41
3.6.6 Receipts and accruals of a capital nature (continued) ............................................................... 42
3.6.8 Secondary purpose ......................................................................................................................... 43
3.6.9 Receipts and accruals of a capital nature (continued) ............................................................... 43
3.6.10 Receipts and accruals of a capital nature (continued) ............................................................. 44
Exercise 1 ................................................................................................................................................... 45
Considerations to take into account: Capital vs Revenue in nature ................................................. 47
Exercise 2: .................................................................................................................................................. 50
Chapter 21 ................................................................................................................................................. 54
SOURCE AND NON-RESIDENTS ............................................................................................................. 54
21.1 Overview ........................................................................................................................................ 54
21.2 Principles of South African taxation of cross-border transactions .............................................. 56
21.3 Sources (s 9) ................................................................................................................................... 58
Statutory Source Rules .......................................................................................................................... 58
21.3.1 Source of dividend income ......................................................................................................... 58
21.3.2 Source of interest income............................................................................................................ 59
21.3.5 Sources of amounts derived from the disposal of assets ....................................................... 60
21.3.8 Source of amounts received from a retirement fund .............................................................. 61
Common Law Source Rules .................................................................................................................. 62
Common law source principles............................................................................................................... 62
21.3.4 Source of rental income ............................................................................................................... 62
2
, 21.3.6 Source of income from services rendered ................................................................................ 63
21.5 South African taxation of income of non-residents ..................................................................... 64
21.5.2 Withholding taxes ................................................................................................................... 64
Withholding taxes on Immovable Property .......................................................................................... 66
Withholding taxes on Interest ................................................................................................................. 69
Withholding taxes: Summary ................................................................................................................ 71
Chapter 4 ................................................................................................................................................... 72
SPECIAL INCLUSIONS .............................................................................................................................. 72
4.1 Special Inclusions Fundamentals .................................................................................................... 72
4.2 Annuities .......................................................................................................................................... 72
4.3 Alimony payments........................................................................................................................... 74
4.4. Services ........................................................................................................................................... 74
4.5 Restraint of trade ............................................................................................................................. 76
4.6 Services: Compensation for termination or variation of employment ......................................... 77
Thought Process (4.6) ............................................................................................................................... 79
4.9 Lease Premiums .............................................................................................................................. 80
4.10 Compensation for Imparting Knowledge and Information ........................................................ 80
4.11 Leasehold Improvements ............................................................................................................. 81
4.12 Fringe benefits .............................................................................................................................. 82
4.13 Proceeds from the disposal of Certain Assets............................................................................. 82
4.14 Dividends ....................................................................................................................................... 83
4.19 Amounts required to be included in taxpayer’s ‘income’ .......................................................... 83
Guidance on Section Referencing ........................................................................................................ 86
Relevant Tables for Chapter 4 .............................................................................................................. 87
Table 1 – Subtotal method: Comprehensive framework for 2020 year of assessment .................. 87
Table 2 – Natural persons including special trusts, insolvent and deceased estates ..................... 88
Table 3 – Retirement lump sum benefits and severance benefits..................................................... 88
Chapter 5 ................................................................................................................................................... 89
EXEMPT INCOME ..................................................................................................................................... 89
5.1. Fundamentals ................................................................................................................................. 89
5.2. Exemptions incentivising investments .......................................................................................... 90
5.2.1. Interest received by Natural persons ......................................................................................... 91
5.2.2. Interest received by Non-residents ............................................................................................. 91
5.2.3. Amounts received from tax-free investents ............................................................................... 96
5.2.7. Proceeds from insurance policies .............................................................................................. 102
5.3. Exemptions relating to dividends ............................................................................................... 104
5.3.1. Dividends from resident companies ......................................................................................... 105
5.3.8. Foreign dividends ........................................................................................................................ 106
5.4. Exemptions relating to employment .......................................................................................... 108
5.4.1. Foreign pensions ......................................................................................................................... 108
3
, 5.4.2. Unemployment insurance benefits............................................................................................ 109
5.4.3. Uniforms and uniform allowances ............................................................................................. 109
5.4.4. Relocation benefits ...................................................................................................................... 109
5.4.9. Employment Outside RSA .......................................................................................................... 110
5.5. Exemptions that Incentivise Education ....................................................................................... 111
5.5.1. Bursaries and Scholarships ......................................................................................................... 111
5.10. Exemptions aimed at amounts that are subject to withholding tax ....................................... 113
5.10.3. Interest Paid to Non-residents ................................................................................................. 113
5.11. Other Exemptions ...................................................................................................................... 113
5.11.1. Alimony and Maintenance........................................................................................................ 113
5.11.4. War Pensions and Awards for Diseases and Injuries ............................................................ 114
Chapter 6 ................................................................................................................................................. 115
GENERAL DEDUCTIONS ........................................................................................................................ 115
6.1. Overview ....................................................................................................................................... 115
6.2. Meaning of ‘carrying on a trade’ ................................................................................................. 116
6.3. General deduction formula (GDF) ............................................................................................... 119
6.3.1. ‘Expenditure and losses’ ............................................................................................................. 120
6.3.2. ‘Actually incurred’ ........................................................................................................................ 120
6.3.3. ‘During the year of assessment’................................................................................................. 122
6.3.4. ‘In the production of income’ .................................................................................................... 122
6.3.5. ‘Not of a capital nature’ .............................................................................................................. 124
6.5. Section 23 Prohibited Deductions .............................................................................................. 127
6.5.1. Private maintenance expenditure.............................................................................................. 127
6.5.2. Domestic or Private expenditure ............................................................................................... 127
6.5.12. Expenditure relating to Employment or Office ..................................................................... 128
6.5.6. Expenditure incurred toproduce exempt income................................................................... 131
6.5.7. Non-trade expenditure ............................................................................................................... 132
6.6. Prohibitions of double deductions .............................................................................................. 133
6.8. Excessive Expenditure ................................................................................................................. 133
6.9. Cost of assets and VAT ................................................................................................................ 134
6.10. Specific Transactions.................................................................................................................. 135
6.10.1 Advertising ................................................................................................................................... 135
6.10.2 Copyrights, inventions, patents, trademarks and know-how ............................................... 135
6.10.3 Damages and compensation .................................................................................................... 135
6.10.4 Education and continuing education ....................................................................................... 135
6.10.5 Employment and services rendered ........................................................................................ 135
6.10.6 Fines.............................................................................................................................................. 136
6.10.7 Goodwill ....................................................................................................................................... 136
6.10.10 Losses: Fire, theft and embezzlement ................................................................................... 136
6.10.11 Losses: Loans, advances and guarantees ............................................................................. 137
6.10.12 Losses: Sale of debts................................................................................................................ 137
6.10.13 Provisions for anticipated losses or expenditure ................................................................. 137
Chapter 7 ................................................................................................................................................. 138
NATURAL PERSONS ............................................................................................................................... 138
4
Notes made in the 2020 academic year
All notes up to and including Test 3 contents
(Test 1 + Test 2 + Test 3)
Tax email address:
TABLE OF CONTENTS
Chapter 1 ..................................................................................................................................................... 8
GENERAL PRINCIPLES OF TAXATION...................................................................................................... 8
Introduction to taxation: ......................................................................................................................... 8
Types of taxes ............................................................................................................................................. 8
1.1 Overview: tax policy .......................................................................................................................... 9
1.2 Tax base ............................................................................................................................................. 9
How should taxes be levied? .................................................................................................................. 10
1.3 Tax rate structure ............................................................................................................................ 10
1.4 Principles of taxation ....................................................................................................................... 14
Maxims of taxation (Adam Smith) ......................................................................................................... 14
Chapter 2 ................................................................................................................................................... 15
TAXATION IN SOUTH AFRICA ................................................................................................................ 15
2.2 Taxation in South Africa .................................................................................................................. 15
2.2.1 Brief history of taxation in South Africa ....................................................................................... 15
2.2.2 The legislative process ................................................................................................................... 16
2.2.3 Current tax legislation .................................................................................................................... 17
2.3 Administration of tax legislation..................................................................................................... 18
2.4 Interpretation of tax law.................................................................................................................. 18
2.4.1 Tax Legislation................................................................................................................................. 19
2.4.2 Judicial decisions ............................................................................................................................ 19
2.4.3 Rules of Interpretation.................................................................................................................... 20
2.5 Illustrating the components of normal tax and the interpretation of tax law in South Africa..... 20
1
, 2.5.1 The incidence of normal tax (s 5) .................................................................................................. 20
2.5.2 Rate structure of normal tax .......................................................................................................... 21
2.5.3 Tax base of normal tax ................................................................................................................... 22
Broken years of assessment .................................................................................................................... 24
Chapter 3 ................................................................................................................................................... 26
GROSS INCOME ....................................................................................................................................... 26
3.1 Basic Framework to Calculate a Person’s Taxable Income........................................................... 26
The definition of ‘gross income’ [s1(1)] .................................................................................................. 26
3.2. Determine if taxpayer is resident or non-resident ....................................................................... 27
3.3 Meaning of ‘total amount in cash or otherwise’ ............................................................................ 33
3.4 Received by or accrued to .............................................................................................................. 34
3.4.1 Meaning of ‘Received by’ .............................................................................................................. 34
3.4.2 Meaning of ‘accrued to’ ................................................................................................................. 35
3.4.3 Valuation of receipt or accrual ...................................................................................................... 35
3.4.4 Unquantified Amounts ................................................................................................................... 35
3.4.7 Cessation of income ....................................................................................................................... 36
3.4.8 Time of accrual of interest payable by SARS .............................................................................. 37
3.5 Year of assessment .......................................................................................................................... 38
3.6 Receipts and accruals of a capital nature ...................................................................................... 39
3.6.1 Nature of an asset ........................................................................................................................... 40
3.6.2 Intention of a company .................................................................................................................. 40
3.6.3 Business conducted with a profit-making purpose .................................................................... 41
(3.6.4 & 3.6.5 & 3.6.7) .............................................................................................................................. 41
Mixed purpose .......................................................................................................................................... 41
3.6.6 Receipts and accruals of a capital nature (continued) ............................................................... 42
3.6.8 Secondary purpose ......................................................................................................................... 43
3.6.9 Receipts and accruals of a capital nature (continued) ............................................................... 43
3.6.10 Receipts and accruals of a capital nature (continued) ............................................................. 44
Exercise 1 ................................................................................................................................................... 45
Considerations to take into account: Capital vs Revenue in nature ................................................. 47
Exercise 2: .................................................................................................................................................. 50
Chapter 21 ................................................................................................................................................. 54
SOURCE AND NON-RESIDENTS ............................................................................................................. 54
21.1 Overview ........................................................................................................................................ 54
21.2 Principles of South African taxation of cross-border transactions .............................................. 56
21.3 Sources (s 9) ................................................................................................................................... 58
Statutory Source Rules .......................................................................................................................... 58
21.3.1 Source of dividend income ......................................................................................................... 58
21.3.2 Source of interest income............................................................................................................ 59
21.3.5 Sources of amounts derived from the disposal of assets ....................................................... 60
21.3.8 Source of amounts received from a retirement fund .............................................................. 61
Common Law Source Rules .................................................................................................................. 62
Common law source principles............................................................................................................... 62
21.3.4 Source of rental income ............................................................................................................... 62
2
, 21.3.6 Source of income from services rendered ................................................................................ 63
21.5 South African taxation of income of non-residents ..................................................................... 64
21.5.2 Withholding taxes ................................................................................................................... 64
Withholding taxes on Immovable Property .......................................................................................... 66
Withholding taxes on Interest ................................................................................................................. 69
Withholding taxes: Summary ................................................................................................................ 71
Chapter 4 ................................................................................................................................................... 72
SPECIAL INCLUSIONS .............................................................................................................................. 72
4.1 Special Inclusions Fundamentals .................................................................................................... 72
4.2 Annuities .......................................................................................................................................... 72
4.3 Alimony payments........................................................................................................................... 74
4.4. Services ........................................................................................................................................... 74
4.5 Restraint of trade ............................................................................................................................. 76
4.6 Services: Compensation for termination or variation of employment ......................................... 77
Thought Process (4.6) ............................................................................................................................... 79
4.9 Lease Premiums .............................................................................................................................. 80
4.10 Compensation for Imparting Knowledge and Information ........................................................ 80
4.11 Leasehold Improvements ............................................................................................................. 81
4.12 Fringe benefits .............................................................................................................................. 82
4.13 Proceeds from the disposal of Certain Assets............................................................................. 82
4.14 Dividends ....................................................................................................................................... 83
4.19 Amounts required to be included in taxpayer’s ‘income’ .......................................................... 83
Guidance on Section Referencing ........................................................................................................ 86
Relevant Tables for Chapter 4 .............................................................................................................. 87
Table 1 – Subtotal method: Comprehensive framework for 2020 year of assessment .................. 87
Table 2 – Natural persons including special trusts, insolvent and deceased estates ..................... 88
Table 3 – Retirement lump sum benefits and severance benefits..................................................... 88
Chapter 5 ................................................................................................................................................... 89
EXEMPT INCOME ..................................................................................................................................... 89
5.1. Fundamentals ................................................................................................................................. 89
5.2. Exemptions incentivising investments .......................................................................................... 90
5.2.1. Interest received by Natural persons ......................................................................................... 91
5.2.2. Interest received by Non-residents ............................................................................................. 91
5.2.3. Amounts received from tax-free investents ............................................................................... 96
5.2.7. Proceeds from insurance policies .............................................................................................. 102
5.3. Exemptions relating to dividends ............................................................................................... 104
5.3.1. Dividends from resident companies ......................................................................................... 105
5.3.8. Foreign dividends ........................................................................................................................ 106
5.4. Exemptions relating to employment .......................................................................................... 108
5.4.1. Foreign pensions ......................................................................................................................... 108
3
, 5.4.2. Unemployment insurance benefits............................................................................................ 109
5.4.3. Uniforms and uniform allowances ............................................................................................. 109
5.4.4. Relocation benefits ...................................................................................................................... 109
5.4.9. Employment Outside RSA .......................................................................................................... 110
5.5. Exemptions that Incentivise Education ....................................................................................... 111
5.5.1. Bursaries and Scholarships ......................................................................................................... 111
5.10. Exemptions aimed at amounts that are subject to withholding tax ....................................... 113
5.10.3. Interest Paid to Non-residents ................................................................................................. 113
5.11. Other Exemptions ...................................................................................................................... 113
5.11.1. Alimony and Maintenance........................................................................................................ 113
5.11.4. War Pensions and Awards for Diseases and Injuries ............................................................ 114
Chapter 6 ................................................................................................................................................. 115
GENERAL DEDUCTIONS ........................................................................................................................ 115
6.1. Overview ....................................................................................................................................... 115
6.2. Meaning of ‘carrying on a trade’ ................................................................................................. 116
6.3. General deduction formula (GDF) ............................................................................................... 119
6.3.1. ‘Expenditure and losses’ ............................................................................................................. 120
6.3.2. ‘Actually incurred’ ........................................................................................................................ 120
6.3.3. ‘During the year of assessment’................................................................................................. 122
6.3.4. ‘In the production of income’ .................................................................................................... 122
6.3.5. ‘Not of a capital nature’ .............................................................................................................. 124
6.5. Section 23 Prohibited Deductions .............................................................................................. 127
6.5.1. Private maintenance expenditure.............................................................................................. 127
6.5.2. Domestic or Private expenditure ............................................................................................... 127
6.5.12. Expenditure relating to Employment or Office ..................................................................... 128
6.5.6. Expenditure incurred toproduce exempt income................................................................... 131
6.5.7. Non-trade expenditure ............................................................................................................... 132
6.6. Prohibitions of double deductions .............................................................................................. 133
6.8. Excessive Expenditure ................................................................................................................. 133
6.9. Cost of assets and VAT ................................................................................................................ 134
6.10. Specific Transactions.................................................................................................................. 135
6.10.1 Advertising ................................................................................................................................... 135
6.10.2 Copyrights, inventions, patents, trademarks and know-how ............................................... 135
6.10.3 Damages and compensation .................................................................................................... 135
6.10.4 Education and continuing education ....................................................................................... 135
6.10.5 Employment and services rendered ........................................................................................ 135
6.10.6 Fines.............................................................................................................................................. 136
6.10.7 Goodwill ....................................................................................................................................... 136
6.10.10 Losses: Fire, theft and embezzlement ................................................................................... 136
6.10.11 Losses: Loans, advances and guarantees ............................................................................. 137
6.10.12 Losses: Sale of debts................................................................................................................ 137
6.10.13 Provisions for anticipated losses or expenditure ................................................................. 137
Chapter 7 ................................................................................................................................................. 138
NATURAL PERSONS ............................................................................................................................... 138
4
