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Notes ACCA Paper F6 (ZAF) Taxation - South Africa

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Contents

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About ExPress Notes

3

1.

The South African Tax System

7

2.

Taxation of Individuals and Businesses

13

3.

Special Inclusions

21

4.

Exempt Income

27

5.

General Deduction Formula

35

6.

Income and Expenses – Individuals

39

7.

Fringe Benefits

48

8.

Employees Tax and Provisional Tax

65

9.

Retirement and Lump Sum Benefits

71

10.

Special Deductions and Allowances

75

11.

Capital Gains Tax

93

12.

Taxation of Partnerships

95

13.

Taxation of Companies and Close Corporations

97

14.

Value Added Tax (VAT)

99

15.

Administrative Procedures

103

© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

START About ExPress Notes We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. It’s a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials:    

The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.

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Everybody in the World has free access to ACCA’s own database of past exam questions, answers, syllabus, study guide and examiner’s commentaries on past sittings. This can be

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.

How to get the most from these ExPress notes For people on a classroom course, this is how we recommend that you use the suite of learning materials that we provide. This depends where you are in terms of your exam preparation for each paper. Your stage in study for each paper

These ExPress notes

ExP recommended course notes, or ExPedite notes

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Prior to study, e.g. deciding which optional papers to take

Skim through the ExPress notes to get a feel for what’s in the syllabus, the “size” of the paper and how much it appeals to you.

Don’t use yet

Don’t use yet

Have a quick look at the two most recent real ACCA exam papers to get a feel for examiner’s style.

At the start of the learning phase

Work through each chapter of the ExPress notes in detail before you then work through your course notes.

Work through in detail. Review each chapter after class at least once.

Nobody passes an exam by what they have studied – we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this.

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Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.

Try to do at least one past exam question on the learning phase for each major chapter.

© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

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Your stage in study for each paper

These ExPress notes

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Practice phase

Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident you’ll remember without reviewing them.

Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if there’s something in an answer that you don’t understand.

This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Don’t be tempted to fall into “passive” revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time.

Download the two most recent real exam questions and answers.

The night before the real exam

Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.

Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still don’t understand. It’s too late now.

Don’t touch it!

Do a final review of the two most recent examiner’s reports for the paper you will be taking tomorrow.

At the door of the exam room before you go in.

Read quickly through the full set of ExPress notes, focusing on areas you’ve highlighted, key workings, approaches to exam questions, etc.

Avoid looking at them in detail, especially if the notes are very big. It will scare you.

Leave at home.

Leave at home.

© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

Read through the technical articles written by the examiner. Read through the two most recent examiner’s reports in detail. Read through some other older ones. Try to see if there are any recurring criticism he/ she makes. You must avoid these!

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 1

The South African Tax System

KEY KNOWLEDGE 1. The Overall Function and Purpose of Taxation in the Modern Economy (a) Why does a country levy taxes? (b) Is there any need for a country to levy taxes on its citizens? (c) How did the early economists describe taxation and its role in the economy? Questions that we may have all asked at some stage of our lives! (a) A country levies taxes to obtain the necessary funds to ensure the efficient dayto-day running of it. (b) Yes, if there is no income then there will be insufficient funds for essential services.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

(c) Adam Smith in his Wealth of Nations (1991: 498) premised four maxims with regard to tax: 

All subjects of every state need to contribute towards the upkeep of the government in proportion to the revenue they receive

The tax that each individual contributes needs to be certain, not arbitrary

Tax should be levied at a time and in a manner that is convenient for the taxpayer

Taxes should be designed so as to take out and keep out of pocket as little as possible over and above the impact it has on government coffers

These four requirements would ideally result in an equitable tax system with adequate revenue in government coffers. Over the years, other well-known economists have expended on Adam Smith’s theory, but the basic principles remain.

KEY KNOWLEDGE 2. Types of Taxes There are two types of taxation: (1) Direct tax. This is tax levied on persons either individuals or the corporate sector, and (2) Indirect tax. This is tax levied on transactions

KEY KNOWLEDGE 3. Administration of the Act Administration of the Act is contained in sections 3 and 4 of the Income Tax Act 58 of 1962 (the Act). The Commissioner for the South African Revenue Services (Commissioner) is responsible for carrying out the provisions of the Act.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

As the Constitution of the Republic of South Africa is the supreme law, no provision in the Income Tax Act 58 of 1962 can contravene this. For judicial decisions, the English stare decisis rule is accepted, which entails the principle of legal precedence. If a taxpayer wants to appeal an overruled objection, the following route will have to be followed: (1) Tax Board. Here appeals of less than R500 000 are heard. (2) Tax Court. This was previously referred to as the Special Court for hearing Income Tax Appeals and is not a court of law. The decisions made are only binding on the parties relevant to that specific case. (3) Provincial Divisions of the High Court. These are generally bound by their own decisions (4) Highest Court of Appeal. This court is not bound by any provincial decisions.

KEY KNOWLEDGE 4. Income Tax The Income Tax Act 58 of 1962 governs legislation of income tax and provides the provision for levying the following taxes:     

Normal tax (referred to as income tax) Turnover tax Donations tax Secondary tax on companies (STC) which is expected to be replaced by dividends tax Withholding tax

A brief description of each of these taxes follow: 4.1 Normal Tax Section 5(1) of the Income Tax Act 58 of 1962 establishes the liability for normal tax and is imposed on all persons who have taxable income. Natural persons

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between 18% and 40%

Trusts

40%

South African Companies

28%

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

South African branches of foreign Companies

33%

Personal Service Provider Companies Small Business Corporations

33% 0%, 10% and 28% turnover limit R14 million

4.1.1 Individuals Individual taxpayers are allowed a rebate, referred to as the natural rebate. All individual taxpayers over the age of 65 are allowed the natural rebate and the secondary rebate. For the year of assessment ended 28 February 2013 the following applies: Natural/primary rebate

R11 440

Secondary rebate (65 years and older)

R6 390

Tertiary rebate (75 years and older)

R2 130

4.1.2 Year of assessment For persons other than companies – the year of assessment always ends on the last day of February – the “tax year” therefore is the period from 1 March 2012 to 28 February 2013 for the current tax year.

4.2 Capital Gains Tax This tax was introduced on 01 October 2001 and is a tax on capital gains. Capital gains tax is a tax on the disposal or deemed disposal of capital assets. The amount of the capital gain included depends on the nature of the taxpayer, i.e. whether the taxpayer is an individual or a corporate entity. The taxable capital gain for a natural person (individual taxpayer) will be included in income at a rate of 33,3% of the gain whereas a company, close corporation or trust (corporate entity) will include 50% of the gain.

4.3 Donations Tax Certain donations are subject to tax at a flat rate of 20% on donations made.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

4.4 Secondary Tax on Companies (STC) This tax is aimed at encouraging companies to retain profit rather than declaring dividends. STC is payable by companies or close corporations at the rate of 10% of the net dividend distributed. This legislation have been replaced by dividend tax on the 1st April 2012.

4.5 Withholding Tax Withholding tax is levied on non-residents. Withholding tax is payable by the South African Resident who pays the non-resident, which implies that the resident needs to withhold a certain percentage of the non-residents’ income. The following represent the percentage of withholding tax: Royalties

12% unless a double tax agreement exists.

Payments for fixed property acquired from a non-resident

between 5 and 10%

Non-residents sport-persons and entertainers

15%

KEY KNOWLEDGE 5. Tax Framework Below is the breakdown on the framework of tax payable: GROSS INCOME (Section 1)

XXX

Less: Exempt Income (Section 10)

(XX)

INCOME

XXX

Less: Deductions and Allowances (Sections 11-19 and 23)

(XXX)

Add: Taxable capital gains (Section 26A) TAXABLE INCOME

XX XXX

Normal tax is levied on taxable income.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

6. Value-Added Tax (VAT) VAT is an indirect tax levied on goods and services at a rate of either 0% or 14 %.

7. Estate Duty This is a tax levied on a deceased estate at a rate of 20% of any amount exceeding R3,5 million.

8. Transfer Duty Transfer duty is a tax by a purchaser when fixed property is bought in South Africa. The tax is payable on a sliding scale – 0%; 5% and 8%. Trusts, companies and close corporations pay a flat rate of 8%.

9. Stamp Duty Stamp duty is payable at a flat rate of 0,5 % on any lease of fixed property which is in writing.

10. Securities Transfer Tax (STT) STT is payable at the rate of 0,25 % of the value of any shares purchased.

11. Tax Avoidance and Evasion There is a distinct difference between tax avoidance and tax evasion. Tax avoidance denotes a legitimate manner in which a taxpayer arranges his tax affairs to reduce or eliminate the amount of tax payable. Tax evasion refers to the illegal activity of eliminating the tax burden deliberately. This is a criminal offence and subject to severe penalties. The Act contains various specific anti-avoidance provisions included in sections 7(2) to 7(10), 8E, 8F, 9D, 22(8) and 54 to 64, with the provisions on impermissible tax avoidance arrangements set out in Sections 80A to 80L of the Income Tax Act 58 of 1962.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 2

Taxation of Individuals and Businesses

KEY KNOWLEDGE Gross Income Background Gross income forms the basis of the tax calculation as can be seen from the tax framework. This chapter deals with the calculation of gross income applicable to both individuals and companies. It further emphasizes the sections of the Act and provides the required knowledge for the application and computation of gross income for individuals and companies.

1. Introduction Gross income is defined in section 1 of the Act as:

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Gross income, in relation to any year or period of assessment, means – (i) in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such resident; or (ii) in the case of any person other than a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within or deemed to be within the Republic, during such year or period of assessment, excluding receipts and accruals of a capital nature, … The definition may be broken down as:      

the total amount in cash or otherwise received by or accrued to, or in favour of, a person from anywhere in the case of a person who is a resident from a South African source in the case of a non-resident other than receipts and accruals of a capital nature

Each of these components will be dealt with below. Although section 1 of the Act defines gross income, case law plays an active role in the computation of gross income. Section 1 is further complicated by the special inclusions which do not follow the rules in the body of section 1. These are inclusions that would otherwise have been excluded from the above definition of gross income.

2. Total Amount There must be an amount received or accrued.

3. In Cash or Otherwise Not only receipts of money fall into gross income.

4. Received By or Accrued To Related to time and establishes the particular tax year in which the gross income arises. The general rule is that no liability for tax can arise where there is no receipt or accrual.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Gross income arises at the earlier of:  

Date of receipt Date of accrual.

5. Receipt An amount is received by a taxpayer only if it is received by him on his own behalf for his own benefit.

6. Accrual Lategan v CIR (1926 CPD) Proceeds from the sale of wine by a farmer were to be received partly in the year in which the sale took place and in subsequent years. The taxpayer contended that the amounts to be received by him in subsequent years had not accrued to him in the year of sale. The Court decided against the taxpayer and held that ‘accrued to’ means ‘entitled to’. 7. Capital and revenue All receipts and accruals must be either capital or revenue (income) in nature. There is no definition in the Act of receipts of a capital nature. From the many judicial decisions, it is obvious that the concept is not a precise one and there is no single test for receipts of a capital nature.

8. Intention “With what intention did the taxpayer acquire and hold the asset?” This is the most important test used by the courts. If the taxpayer acquired and held the asset for the purpose of resale at a profit, the proceeds will constitute revenue and will therefore be regarded as income in nature. If the asset was held not for the purpose of resale but, for example, to produce income in the form of rent, interest or dividends, the proceeds will be regarded as capital.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

9. Subjective vs Objective Factors The taxpayer’s, ipse dixit i.e. his own evidence will be considered by the court but, because of subjectivity, self-interest and uncertainties of recollection will not be decisive. Objective factors that would be reviewed by the Court: 

Conduct of the taxpayer in relation to the transaction

Nature of the taxpayer’s business or occupation

Frequency of similar transactions

Continuity of activities

The length of time for which the asset was held

The objectives of the owner captured in statutory documents

Activities of the owner in relation to the asset up to the time of deciding to sell it

Documentary evidence (minutes etc)

History of a taxpayer’s holding of an asset

Circumstances of the realization

Treatment of proceeds

Ability of taxpayer’s financial resources to accommodate his professed intentions

Involvement in a scheme of profit-making

10. Mixed intentions Main or dominant factor considered if there were mixed intentions

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

11. Alternative Intentions If the taxpayer has two alternative business methods, i.e. he is willing to secure a profit either by reselling or by using the asset to produce income; the income is of a revenue nature.

12. Change of Intention In deciding whether a taxpayer has changed his intention the courts will consider the history and activities of the taxpayer

13. Specific transactions

Advance Payments and Deposits Subject to normal tax in the year that they are received, other than those of a capital nature. Distinguish between a loan and a payment made in advance. Advance Payments and Deposits – Containers Commodities are sometimes sold subject to the payment of a deposit for the container. If these deposits are not received in trust the deposits from part of the suppliers’, gross income, notwithstanding the fact that there is an undertaking by the supplier to refund the deposit if the container is returned (Brookes Lemos Ltd v CIR (1947 AD)) Closure of a business Proceeds derived from trading stock are of a revenue nature. Copyrights, inventions, patents, trademarks, formulae and secret processes Amounts received for the disposal of any of the above by a person who originally held the rights as an income-producing investment are of a capital nature.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

If the assets were acquired or are subsequently held for the purposes of a profitable resale in a profit-making scheme, the proceeds would be income in nature and subject to normal tax. Damages and Compensation Any amount received for the loss, surrender or sterilization of a fixed capital asset or an income-producing asset is a receipt of a capital nature (Burmah Steamship Co Ltd v IRC

(1931 SC)). Debts and Loans If debts are bought with the intention of making a profit, the receipt is income in nature. When a person buys a business as a going concern, the debts bought would be of a capital nature. Gambling The results of betting transactions systematically carried on are included in gross income (Morrison v CIR (1950 A). Gifts, Donations and Inheritances A lump sum payment or an asset received is of a capital nature. If in the form of an annuity, it is taxable. Goodwill Amount received for the sale of goodwill of a business is a receipt of a capital nature. If goodwill takes the form of an annuity, the annual payment is taxable in terms of para (a) of Section 1. Horse Racing Racing stakes won by racehorse owners are subject to normal tax if the activities are undertaken to derive a profit.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Interest Interest being the consideration received for the use of money or the provision of credit becomes part of gross income. Kruger Rands Subjected to the same tests applying to other assets in being either income or capital. Land and Property Transactions If the assets are acquired for the purpose of resale, the income will be of a revenue nature. Losses are deductible in this instance. The proceeds of any assets acquired for the purpose of using the asset in a trade or for the purpose of deriving rental income will be of a capital nature. Restraint of Trade Although capital in nature, the payments expressly included in gross income of certain taxpayers in terms of para (cA) of section 1. 14. Residence Natural persons follow two rules

the ordinarily residence/ordinarily resident test, OR

the physical presence test

Ordinarily Resident This term is not defined in the Income Tax Act 58 of 1962 making necessary for the courts to formulate a definition. In CIR v Kuttel (1992 A), it was made clear by the learned judges that; “the natural and ordinary meaning of ‘ordinarily resident’ was ‘that a person must be habitually and normally resident here, apart from temporary or occasional absences of long or short duration’”

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Ordinary residence is not determined by physical presence. Physical Presence If a person is not ordinarily resident in South Africa, he will be treated as a resident for tax purposes if he spends a certain amount of time in the Republic.

Present in the Republic For more than 91 days

NO = Not resident

(in aggregate) during the year of assessment

yes

Present in the Republic For more than 91 days

NO = Not resident

(in aggregate) during each of the previous five years

yes

Present in the Republic For periods exceeding 915 Days (in aggregate) during

NO = Not resident

The previous five years

YES = RESIDENT

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 3

Special Inclusions

KEY KNOWLEDGE Special Inclusions Introduction Although the definition of gross income seems quite comprehensive, amendments to this definition were made on a regular basis. These, in effect, resulted in items being included in gross income although they were excluded by the general definition. The follow-on to the definition of gross income reads: “but including, without in any way limiting the scope of this definition, such amounts

(whether of a capital nature or not) so received or accrued as are described hereunder, namely……” Which is followed by inclusions listed in paragraph (a) to (n).

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

1. Annuities Paragraph (a) deals with this inclusion ‘(a) any amount received or accrued by way of annuity, including any amount contemplated in the definition of “annuity amount” in section 10A(1)’. There is no definition of annuity in the Act However, ITC 761 (1952) outlines the main characteristics of an annuity:   

It provides for an annual fixed payment It is repetitive It is chargeable against some person

2. Services Rendered Paragraph (c) of the definition. Includes in gross income any amount received by or accrued to in respect of services rendered or employment or the holding of an office. This paragraph was included to overcome any voluntary awards that do not fall into the general definition of gross income. Paragraph (c) (ii) deems any amount received in respect of services rendered to have been received by the person who rendered the service. Examples of amounts that fall into paragraph ( c): 

Voluntary bonuses

Tips for waiters

Rewards for providing information to police (CSARS v Kotze 2002 C)

3. Restraint of trade Paragraph (cA) – Restraint of trade Receipts Any amount received or accrued in respect of restraint of trade payments fall into gross income irrespective of the nature.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

4. Lump Sum Payments Compensation for loss of office Paragraph (d) includes any amount, including a voluntary award, received or accrued in the year of assessment in respect of relinquishment, termination, loss, repudiation, cancellation or variation of an office or employment in gross income. This does not apply to a lump-sum award from a pension, provident or retirement annuity fund.

5. Deemed accrual on death Pension, Provident and Retirement Annuity Funds Paragraph (e) - Portion of the lump sum which is taxable is calculated in terms of the Second Schedule. The taxable portion meaning the balance remaining after the deduction of the allowable deductions in terms of the Second Schedule from the gross amount received. Paragraph (eA) – includes two-thirds of the fund benefits transferred or converted to a provident fund in the gross income of a member of a public-sector pension fund. Two-thirds payable to the member or utilised to redeem a debt are also included and this extends to the conversion if a court order is granted during the divorce proceedings of a member.

Commutation of Amounts due Includes any amount received by or accrued to in commutation of amounts due under a contract of employment or services rendered. Paragraph (f) applied to:   

Lump sum payment for breach of contract by employer Lump sum payment from employer in lieu of notice on termination of services Lump sum on retirement being in lieu of leave privileges

Para (d) refers to ‘any office or employment’ while para (f) refers to ‘any contract of employment or service’

6. Lease Premiums Payment for the use of property is rental and revenue in nature. However, an amount may be payable for the right of use of the property instead of or in addition to rent. This is referred to as a lease premium and specifically included under paragraph (g).

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

The lessee pays lease premiums to the lessor (Deduction spread over the duration of the lease (section 11(f))

7. Know-How Payments Gross income includes any amount received or accrued from another person, in the year of assessment, as consideration for the imparting of or the undertaking to impart any scientific, technical, industrial or commercial knowledge or information or for the rendering of or the undertaking to render any assistance in connection with the application of such knowledge (paragraph (gA)). Taxable in full in the year that it is received or accrued whether it is paid as a premium or like consideration or not.

8. Leasehold Improvements Paragraph (h) A leasehold improvement is an improvement that the lessee effects on leased property. This paragraph was introduced as a direct result of the decision in CIR v Butcher Brothers (Pty) Ltd (1945). Amount to be included in gross income:  

Amount stipulated in the agreement as the value of the improvements or as the amount to be expended If no amount is stipulated, an amount representing the fair and reasonable value of the improvements

Lessor: paragraph (h) gross income inclusion – tax full amount in one year Lessee: Deduction spread over the duration of the lease (section 11(g)) from the date of completion of the improvements.

9. Fringe Benefits The gross income of a taxpayer includes the cash equivalent of any benefit or advantage granted in respect of employment or the holding of an office as defined in the Seventh Schedule of the Act and amounts required to be included under s 8A. Only applies to employees and office holders (directors).

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

If an amount is included in paragraph (i) it is excluded from paragraph (c) Paragraph(c)

Paragraph (i)

yes

Amount

no

yes

Voluntary

no

no

Value to recipient (as determined by 7th schedule)

yes yes

For services For employment/office

yes no yes

Examples of paragraph (i) income are:      

Use of employer-owned car Use of residential accommodation Schooling of employees children paid for by employer Use of employer-owned asset Services provided by the employer to the employee Low interest loans.

10. Proceeds from the Disposal of Certain Assets The subsequent disposal of assets that are used as capital assets within its business operation, but form part of the company’s revenue assets, are included in gross income by paragraph (jA). Paragraph (jA) includes in gross income:    

Any amount received by or accrued to the taxpayer during the year of assessment From the disposal of any asset Manufactured, produced, constructed or assembled by him That is similar to any other asset manufactured, produced, constructed or assembled by him for the purposes of manufacture, sale or exchange.

11. Dividends Dividends are amounts of a revenue nature being the fruit of capital employed i.e. shares (paragraph (k)). Dividends from a South African source fall into gross income for non-residents.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

12. Subsidies and Grants Para (l) includes any amount received by or accrued to by way of:   

A grant, or A subsidy in respect of soil erosion, or any development expenditure in respect of the First Schedule

13. Amounts received by or accrued to s 11E sporting bodies Any amounts received by or accrued to a company, non-profit company or an association of persons incorporated, formed or established in the Republic for the purpose of carrying on sporting activities. Section 11E provides for the deduction of certain expenditure.

14. Key Man Policies Paragraph (m) - Employer insures the life of a member of staff, the employer being the beneficiary of the policy. When the policy matures, the amount is included in the employer’s gross income if the premiums were deductible in terms of s 11(w) only for the 2012 year of assessment. This section was deleted by Section 6 of Act 7 of 2010.

15. Recoupments Paragraph (n) includes in gross income amounts that are required to be included in gross income in terms of s 8(4) or s 24I. Whenever a claimed deduction in respect of expenditure has been recouped or recovered, this amount falls into gross income of the taxpayer. This recoupment only arises when an amount has been received or accrued and not when a gain is made. e.g. a compromise with creditors does not represent an amount received or accrued. The amount included in gross income can never be greater than the original deduction. CONCLUSION Paragraph’s (a) to (n) of Section 1 of the Income Tax Act 58 of 1962 include amounts in gross income which would otherwise not be included. A thorough knowledge of gross income including the special inclusions is paramount to the study of tax. It must be remembered that all items of income are included in gross income even if they are later exempt or deducted.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 4

Exempt Income

Syllabus Reference Background This chapter deals with income exempt from taxation. Relevant sections of the Act are dealt with and the application and computation of exempt income of individuals and companies is demonstrated.

1. Introduction Sections 10 and 10A of the Act deal with exempt income. 1.1 Calculation of income involves the exemption of exempt income from gross income. GROSS INCOME less EXEMPT INCOME INCOME

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XXX (XX) XX

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Exempt income is income that is free from normal tax. All ‘exempt income’ items form part of gross income, but are excluded when income is calculated; and are housed in section 10 and section 10A of the Income Tax Act 58 of 1962.

2. Non-residents As per the definition of gross income, non-residents are subject to normal tax on any income derived from a source within or deemed to be within the Republic of South Africa.

KEY KNOWLEDGE 3. Residents 3.1 Basic Dividend and Interest Section 10(1)(i) South African interest and non-exempt South African dividends are exempt subject to the following limits: A natural person is allowed a basic interest exemption of:  

R33 000 in the case of a person over 65 R22 800 in the case of a person under 65

3.2 Foreign Interest and Dividends Foreign interest and dividends, which are not otherwise exempt, are exempt to a maximum of R3 700. The exemption is first applied to a foreign dividend and then to foreign interest. If any portion of the R3 700 foreign dividends has been claimed, the interest exemptions are reduced accordingly. Interest exemption is ONLY available to INDIVIDUALS.

Section 10(1) (k) 3.3 Exemption of South African dividends – s 10(1)(k)(i) Dividends accrued to or received by any person is exempt except:

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

    

Dividends distributed by a company the shares of which are ‘property shares’ as defined and distributed by any portfolio of any collective investment scheme Where dividends form part of any consideration received in respect of the sale of shares to a company in respect of a share buy-back scheme Dividends received in respect of a restricted equity instrument Any dividends received in consequence of a cession Dividends received in respect of borrowed shares Foreign dividends and dividends paid by a headquarter company

3.4 Foreign Dividends – s 10(1)(k)(ii) There are four (4) exemptions:    

Foreign dividends paid out of income that has been taxed in the Republic profits were or will be taxed in the Republic) Arose directly or indirectly from any dividends declared by any company which is resident Dividends paid out of profits which have been included in shareholders income in terms of section 9D (Controlled foreign company) Foreign dividends received by or accruing to a resident who holds more than 20% equity shares and voting rights in the foreign company referred to as a participation exemption.

Participation exemption will not apply on or after 1 January 2011 if: 

the dividend arises from an amount that is deductible in the hands of the person paying the dividend but not subject to tax in the hands of the recipient or where the recipient is a controlled foreign company, or

the dividend is received from a foreign collective investment scheme, or

the dividend is received from a foreign financial instrument holding company.

3.5 Relative to Employment Section 10(1)(nA) Uniform allowance   

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Condition of employment Wear a special uniform while on duty ONLY Exempt from tax if uniform is clearly distinguishable

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Section 10(1)(nB) Relocation benefits Expenses may arise in consequence of:   

Transfer of the employee New appointment Termination

Expenses borne by the employer will not give rise to taxable benefits or advantages to the employee if: 

 

Expenses constitute transportation of the employee, members of his household and their personal goods to his new place of residence from his previous place of residence. Costs which the Commissioner may allow in the sale of employee’s previous residence and settling in allowance Expense of hiring temporary hotel accommodation for the employee and members of his family during the period ending 183 days after the transfer took effect.

Section 10 (1) (nC) Broad-based Employee Share Plan The receipt or accrual of ‘qualifying equity shares’ in a broad based employee share plan is exempt from normal tax but limited by Section 8B to a maximum of R50 000 over a five year period.

Section 10 (1) (nD) This section exempts the receipt or accrual of an amount which constitutes an equity instrument as contemplated in section 8C acquired by that person or consideration for the disposal of an equity instrument which has not vested at the time of acquisition or disposal.

Section 10 (1) (nE) ‘Stop-Loss’ Provision for share incentive schemes Certain amounts received by or accrued to employees under a share-incentive plan are exempt i.e. under the cancellation of a transaction in which the taxpayer bought shares or upon repurchase of shares from the taxpayer.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Section 10 (1) (o) Ship crews and persons outside the Republic Any remuneration derived by an officer or crewmember of a ship engaged in international transportation of passengers and goods if the taxpayer was outside the Republic for a period exceeding 183 days. Any remuneration derived in respect of services rendered for or on behalf of an employer if the taxpayer was outside the republic for a period exceeding 183 full days in aggregate or for a continuous period exceeding 60 days during any 12- month period. Does not apply to remuneration received from an employer in the national or provincial sphere of government, local authorities or similar qualifying public entities.

Section 10(1)(p) Exempts any amount received by or accrued to   

A person who is not a resident For services rendered by him outside the Republic For or on behalf of any qualifying employer or provincial sphere of government or municipality in the Republic.

Section 10 (1) (q) Study Loans and Bursaries Exempts bona fide scholarships granted to enable or assist any person to study at a recognized educational or research institution.    

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Open scholarships and bursaries are exempt from tax (competed for on merit) Closed scholarships and bursaries: Awards to employees- tax exempt as long as the employee agrees to pay the award back to the employer if the employee does not fulfil the obligations Awards to relatives of employees- exempt from tax to the extent of: If the employee earned more than R100 000 per annum, no exemption will be available. If the employee earns less than R100 000 per annum, R10 000 of the bursary will be exempt per recipient per annum

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

3.6 Relative To Pensions Section 10(1)(g) Exempts any amount received as a war pension or as compensation for diseases contracted by persons employed in mining operations

Section 10(1)(gA) Exempts disability pensions paid under Section 2 of the Social assistance Act 59 of 1992.

Section 10 (1)(gB) Exempts compensation paid in terms of the Workmen’s Compensation Act.

Section 10(1)(gC) Exempt from normal tax:  

Any amount received or accrued to any resident under the social security system of another country. Any amount received to a resident from a source outside the Republic, which is not deemed to be from a source in the Republic in terms of section 9(1)(g), in consideration of past employment outside the country.

Section 10(1)(gD) Any funeral benefit payable in terms of the Special Pensions Act 1996 is exempt.

Section 10(1)(gE) Any amount awarded to a person by the minor beneficiary fund is exempt from tax.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Public Benefit Organisations Section 10(1)(cN) The receipts and accruals derived from any ‘public benefit activity’ and receipts and accruals from a ‘public benefit organization’ as defined in S 30(3) to the extent that:  

The receipts and accruals are not from business or trading activities or The receipts and accruals are from certain integral, occasional, or approved business or trading activities (from 1 April 2006)

Public benefit organization is an organization of public character  

Formed and incorporated under S1 of the Companies Act 71 of 2008, or a trust that has been incorporated, formed or established in South Africa Sole object of which is, subject to certain requirements, to carry on one or more public benefit activities in a non-profit manner

Section 10 A Provision which exempts part of an annuity amount. An annuity contract is:     

An agreement concluded by an insurer and a purchaser in terms of which: The insurer agrees to pay the purchaser a fixed sum until the expiry of the term The purchaser agrees to pay the insurer a lump sum No amount will be payable by the insurer other than by way of annuity. Excluding any annuity payable under the rules of the pension, provident or retirement annuity fund.

This section applies to individuals and not to companies. The annuity is divided into a capital and an income section. Capital element is exempt. The Capital element can be calculated as follows:

Y=A x C B Where:

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Y = Exempt capital amount A = Lump sum insured by the annuity B = total expected returns of all annuities in terms of the contract C = The amount of the annuity

Commutation or Termination of the Annuity In terms of Section 10A (3) a portion of the amount will be exempt. Calculated as follows: X=A–D Where: X = The exempt portion A = original amount paid D = total of previously exempt portions received under the contract.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 5

General Deduction Formula

1. Background This chapter deals with deductions allowable in the computation of income tax payable for individuals and companies. Individual deductions are limited compared to those of corporate entities.

KEY KNOWLEDGE 2. General Deduction Formula Having determined the taxpayer’s gross and then deducting all exempt income, the next step is to deduct all allowable deductions in terms of the Act.  

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The general deduction formula – section 11 (a) read with section 23 Specific deductions – Section 11 to section 19

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Section 11 requires  

A trade to be carried on Income to be derived from such trade

Section 11(a) requires that there be     

Expenditure and losses Actually incurred During the year of assessment In the production of income Not of a capital nature

Section 23 (g), prohibits the deduction of   

Any moneys claimed as a deduction To the extent to which The moneys are not laid out or expended for the purposes of trade.

Section 23H limits the deduction to a portion of the expenditure where the benefits resultant on expenditure are for a period which extends beyond the year of assessment.

KEY KNOWLEDGE 3. Requirements of Section 11(a) 3.1 Expenditure and Losses In Joffe & Co. (Pty) Ltd v CIR (1946 AD) the courts considered the meaning of the word ‘loss’. Watermeyer CJ said that: …in relation to trading operations the word is sometimes used to signify a deprivation suffered by the loser, usually an involuntary deprivation, whereas expenditure usually means a voluntary payment of money.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

3.1.1 Actually Incurred “One man may conduct his business extravagantly, incurring expenses that another man does not incur; such expenses are therefore not ‘necessary’, but they are incurred and are therefore deductible (Port Elizabeth Tramway Co Ltd c CIR (1936 CPD)).” The word ‘incurred’ does not mean paid, as long as there is a liability to pay there is an expense and it is deductible. Estimates of contingent liabilities are not expenditure actually incurred.

3.1.2 During the Year of Assessment The courts have held, in Concentra (Pty) Ltd v CIR (1942 CPD), that deductible expenditure is restricted to that incurred in the year of assessment. It cannot be carried forward or back even though it may relate to that year. Section 23H prohibits the deduction where an expense is incurred in one tax year but the benefits are not allowed in full during that year. The deduction is deferred until the full benefit is received.

3.1.3 In the Production of Income The meaning of ‘production of income’ was considered in Port Elizabeth Tramway Co Ltd v CIR (1936 CPD). The taxpayer was a transport company and one of its drivers was involved in an accident resulting in the driver’s eventual death. The company was compelled to pay compensation to the deceased’s dependants. The court held the payment of compensation was in the production of income. To determine whether an expense is in the production of income, two questions need to be asked:  

What gave rise to the expense? Is this closely connected with the income earning activities?

3.1.4 Not of a Capital Nature The courts have laid down some tests for distinguishing between capital and revenue expenditure (New State Areas Ltd v CIR (1946 AD): 

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The costs of working capital assets generally constitute non-capital (revenue) expenditure which is deductible

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

   

The acquisition of a capital asset constitutes a capital expense A distinction between two types of capital is made: Floating capital expense – deductible expense Fixed capital expense – would qualify for capital allowances only

There must be a link between the expenditure and the income-earning activities to warrant the conclusion that it formed part of the cost of performing the income-earning operations, as distinct from the cost of expanding the income producing structure (SIR v Cadac Engineering Works (Pty) Ltd (1965 A)). Another test is to enquire whether the expenditure had the features of an enduring benefitEnduring benefit principle (CIR v George Forest Timber Co Ltd (1924 AD)

CONCLUSION Any deduction that is not allowed under section 11(a) may be deductible under sections 11 (b) to 11 (x). However, the amounts cannot be deducted under both sections 11 (a) and any other section 11.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 6

Income and Expenses - Individuals

Reference 1. Background This chapter deals with income and expenses, which are deductible, pertaining to individual taxpayers. It deals with the sections of the Act and provides knowledge for the application of computation of income and expenses of individuals.

KEY KNOWLEDGE 2. Tax Framework Taxation of Individuals All references to sections are housed in the Income Tax Act 58 of 1962 as amended and all the relevant sections will be discussed later.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

The following is a detailed computation:

GROSS INCOME (Section 1) (general and specific inclusions) Add: Deemed inclusions (Sections 7 and 8(4)(a)) Less: Exempt income (section 10 and 10A) INCOME SUBTOTAL 1

XXX XX (XX) XX

Less: Deductions and Allowances (Sections 11-19 and 23 except ss 11(k), 11(n), 18A and 18) SUBTOTAL 2 Less: Assessed Loss (section 20) SUBTOTAL 3

(XXX) XX (XX) XX

Less: section 11(k)(i) current PF contributions Limited to the greater of R1 750 and 7,5% of RFE * Section 11(k)(ii) arrear PF maximum R1 800 SUBTOTAL 4

(XX) XX

Less: Section 11(n)(aa) current RAF contributions Limited to the greatest of:   

R1 750 R3 500 less s 11(k)(i) 15% of (subtotal 3 –RFE remuneration #)

Section 11(n)(bb) arrear RAF maximum R1 800

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(XX)

SUBTOTAL 5

XX

Add: Taxable capital gains (Section 26A)

XX

SUBTOTAL 6

XX

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Less: Section 18A deductions for donations (limited to 10% x Subtotal 6) SUBTOTAL 7

(XX) XX

TAXABLE INCOME

XXX

*RFE remuneration – any amount on which pension is calculated #Non-RFE – all other remuneration (subtotal 3 calculated on non-RFE)

KEY KNOWLEDGE 3. Individuals A simpler tax computation would be as follows: Calculation of an Individual’s Tax Liability Gross Income (s1)

XXX

Less: Exempt Income (s10 & 10A)

(XX)

Income

XX

Less: Deductions (mainly s11 to s20 & 23)

(XX)

Add: Taxable portion of capital gains

XXX

Taxable Income

XXX

Tax as per tax table (s5 & tax table)

XXX

Less: Rebates (s6)

(XX)

Tax payable

X XX

Tax payable is only calculated on taxable income. Tax tables are provided as an appendix.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

The deductions allowed in the calculation of taxable income for individuals are limited to four in the following specific order: 

Pension Funds

Retirement Annuity Funds

Donations

Medical Expenses

The normal tax payable annually is calculated in accordance with the tax table, which is published each year in the amending act, less any rebates that may apply. Normal tax payable can only be calculated on taxable income. For some taxpayers this will effectively be overridden by the special rules applicable to Standard income tax on employees (SITE). Primary and secondary rebates may be deductible from the normal tax payable. For the year of assessment ended 29 February 2013 they are as follows:   

Primary rebate Secondary rebate (65 years and older) Tertiary rebate (75 years and older)

R11 440 R6 390 R2 130

The primary rebate is available to any taxpayer who is a natural person and can only be claimed against taxable income for the year excluding any severance benefits, retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits. Rebates apportioned when the period is less than 12 months. Tax thresholds – the point at which tax becomes payable:   

Persons under 65 Persons over 65 Persons over 75

R63 556 R99 056 R110 889

4. Partial Period of Assessment Where the period assessed is less than 12 months, the rebates are reduced proportionately   

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In the year the taxpayer is born, if he is liable for tax In the year the taxpayer dies, or In the year in which the taxpayer goes insolvent

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

KEY KNOWLEDGE 5. Capital Gains Tax Tax is levied on the disposal or deemed disposal of capital assets. However, an annual exemption of R20 000 is allowed when calculating taxable capital gains.

Taxable capital gains is determined as follows: Sum of capital gains for the year of assessment

xxx

Less: capital losses for the year of assessment

(xxx)

Less: annual exclusion (exemption)

(R20 000)

Less: capital losses brought forward from previous years Net capital gain for the year

(xxx) xxx

Taxable capital gains for a natural person are 25 % of the net capital gain for the year, in contrast with corporate entities which is 50 % of net capital gain.

KEY KNOWLEDGE 6. Current Pension Fund and Retirement Annuity Contributions Section 11(k) Pension Funds - Current contributions This deduction is granted to an employee, a holder of office or a partner (who was an employee before becoming a partner) who makes current contributions to a pension fund by reason of employment or holding of office.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Deduction is the greater of:  

R1 750 7,5% of remuneration from retirement funding employment

Any disallowed portion may not be carried over to the succeeding years of assessment. Retirement funding employment is defined in section 1 and refers to the employment or holding of office in respect of which the employee or office holder derives remuneration that is taken into account in determining the contributions made to a pension or provident fund.

Arrear Contributions That is where service is bought back is allowed up to a maximum of R1 800 per person, per annum. Any excess may be carried over to the following year of assessment and be deducted subject to the limit. Arrear contributions may also be deducted from non-trade income (e.g. interest, dividends, annuities)

Section 11 (l) Contributions by an employer to pension, provident and benefit funds Any employer may deduct contributions made on behalf and for the benefit of employees subject to:  

if the contribution is a lump sum payment, the Commissioner may allow the deduction in annual instalments. If the contributions per employee exceed 10% of the approved remuneration of the employee and the Commissioner feels that such contribution is excessive, he may disallow any portion of the deduction as exceeds 10% of approved remuneration.

Approved remuneration – so much as the Commissioner considers fair and reasonable in relation to the value of the employees services.

Section 11 (n) Retirement Annuity Contributions

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Current Contributions Allowed subject to certain limitations. Amount that may be deducted is the actual contribution limited to a maximum of the greatest of:   

15% of income from non-retirement funding after setting off any losses and deducting admissible deductions and allowances. R3 500 less any amount allowed in terms of s 11(k) R1 750.

Any disallowed portion may be carried forward to the next year of assessment, subject to the limits. Arrear contributions may be deducted up to a maximum of R1 800 per year of assessment.

KEY KNOWLEDGE 7. Medical Expenses Section 18 limits the deduction on medical expenses to: 

All qualifying expenditure for persons over the age of 65 years

If the taxpayer, his spouse or qualifying child is “handicapped” all qualifying expenses are deductible.

For all other taxpayers: May in determining tax payable deduct monthly contributions to medical schemes (a tax rebate to be known as a medical scheme fees tax credit) up to R230 for each of the taxpayer and the first dependant on the medical scheme and R154 for each additional dependant. When determining taxable income they can also claim a deduction for medical scheme contributions exceeding four times the amount of the medical schemes fees tax credits and any other medical expenses limited to the amount which exceeds 7.5% of taxable income (excluding retirement fund lump sums). So the new deduction will be 230 per month of your tax payble for the year, if you made any contributions

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

8. Deemed Inclusions Section 7 (2) is an anti-avoidance provision that applies to marriages in and out of community of property. It prevents the arrangement of taxable income between spouses so as to reduce their tax liability. Section 7 (2)(a) If a spouse (recipient spouse) receives income in consequence of a donation made by the spouse (donor spouse) with the sole purpose of reducing, postponing or avoiding tax, the donor spouse will be taxed on the income of the recipient spouse. Marriage in Community of Property Trade income – accrues to the spouse who earned it. Rental and non-trade income – deemed to accrue in equal shares to both spouses. Capital gains disposal of joint property, capital gains or losses shared equally between the spouses and each is allowed the annual exclusion of R20 000. Where the disposal is the primary residence, the R1 500 000 primary residence exclusion will be shared between the spouses. If property is excluded from the joint estate, any gains or losses remain those of the disposing spouse. “spouse” is defined in section 1 of the Act and includes customary, religious and live-in unions of a permanent nature.

9. Antedated Pensions and Salaries Section 7A provides for the spread, in arrears, of an antedated salary or pension. An antedated pension or salary is an amount that has become payable with retrospective effect, in respect of the period ending on or before the date on which the grant has become effective. If the period commenced not more than two years before 1 March of the current year of assessment, the amount will be apportioned over the total accrual period on the basis of the number of months in each year of assessment. If the accrual period commenced more than two years before 1 March of the current year of assessment the amount will be deemed to have been received or have accrued in three

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

equal instalments. One third will be taxed in the current year and the remaining two-thirds in each of the previous years of assessment.

CONCLUSION Taxation of individuals is characterized by four main deductions, pension fund contributions, retirement annuity contributions, donations to public benefit organizations and lastly medical deductions. Interest and dividend exemptions are not to be forgotten when calculating taxable income. Normal tax is calculated as per the tax table less the normal rebate and normal tax liability is arrived at.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 7

Fringe Benefits

1. Introduction This chapter deals with fringe benefits. Fringe benefits can be described as the benefits an employee receives from an employer that enhances the basic salary package. The resultant effect is an increase in the gross salary that is received as all the monetary effects of the benefits are included in calculating taxable income.

KEY KNOWLEDGE 2. Taxable Value The taxable value of fringe benefits is included in taxable income through the application of paragraph (c) and (i) of the definition of ‘gross income’ and section 8(1) of the Act.

Paragraph (i) includes in gross income:  

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The cash equivalent Determined under the provisions of the Seventh Schedule

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

  

Of the value of any benefit or advantage Granted in respect of employment or to the holder of any office and Any amount required to be included in the taxpayer’s income under section 8A

The fringe benefits referred to in the Seventh Schedule are as follows:          

Assets acquired at less than actual cost Right of use of an asset (other than a motor vehicle or residential accommodation) Right of use of a motor vehicle Meals, refreshments or vouchers Residential accommodation Free or cheap services Low interest loans Housing subsidies Payment of an employee’s debt or release from an obligation to repay a debt Medical aid contributions.

The taxable amount of a fringe benefit is referred to as the cash equivalent. Section 8(1) includes in taxable income a portion of certain allowances that have not been expended for business purposes.

KEY KNOWLEDGE 3. Allowances Section 8(1) Provides for certain amounts to be included in a taxpayer’s taxable income Taxable income is defined in section 1 as: The aggregate of income minus allowable deductions and set-offs; and all amounts to be included or deemed to be included in taxable income. Section 8(1) deals with: Any allowance or advance paid to a director, holder of any office, manager, employee or other person in respect of the expenses of any:  

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Travelling on business, or Subsistence allowance, or

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Other allowances received by reason of the holding of any office

is included in the taxpayer’s taxable income to the extent that it is not actually spent on business travel or in performing such service, or by reason of the duties of the office-holder. A reimbursive allowance is not included in a taxpayer’s taxable income and is described as: An allowance paid in advance or granted to a recipient for reimbursement of expenditure incurred on the instruction of a principal in the furtherance of the principal’s trade where the recipient is required to account to the principal for the expenditure and provide proof that the expenditure was wholly so incurred.

KEY KNOWLEDGE 4. Travelling Allowances There are two types of travel allowance:  

An allowance or advance in respect of transport expenses, and An allowance or advance to be used by the recipient for paying expenses in respect of a motor vehicle used for business purposes

Allowance for a motor vehicle used by an employee:  

Portion expended for business purposes is tax free Part of the allowance that falls into private use will fall into the recipient’s taxable income.

The portion expended for business purposes is calculated in one of two ways: 

Actual business kilometres travelled during the year multiplied by the deemed rate per kilometre (as per table). This can only be used if the recipient has kept accurate records of business travel Actual expenditure incurred

Business allowance calculated in one of two ways: 

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Actual distance travelled for business purposes during the year, multiplied by a deemed cost per kilometre (determined by reference to a table). Used when the taxpayer has kept accurate records of business travel Expenditure actually incurred for business purposes where accurate records are provided to substantiate this.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Value of the motor vehicle defined as: 

 

Where the motor vehicle has been acquired under a bona fide agreement of sale or exchange concluded by parties dealing at arm’s length, its original cost, including any VAT but excluding finance charges or interest payable. Where the motor vehicle is held under a financial lease or acquired on the termination of the lease, the cash value together with any VAT paid or payable. In any other case, the market value of the motor vehicle when the recipient first obtained it or its right of use, plus an amount equal to the VAT which would have been payable if the vehicle had been purchased at the time at a price equal to the market value.

The rate per kilometre is determined as the sum of: 

 

Fixed cost divided by the total kilometres travelled during the year of assessment. Apportion for less than a year – fixed cost will be the amount, which bears to the fixed cost the same ratio as the period of use for business purposes bears to 365 (366) days. Where the recipient has borne the full cost of the fuel, the fuel cost Where the recipient has borne the full cost of maintaining the vehicle, the maintenance cost

KEY KNOWLEDGE 5. Reimbursive Allowance Fixed rate allowance:  

Distance travelled for business purposes must not exceed 8 000 kilometres No other allowance or reimbursement must be payable by the employer to the employee in respect of the vehicle in question.

The rate is currently at 305 cents per kilometre.

KEY KNOWLEDGE 6. Subsistence Allowance

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Section 8(1)(a) deems certain amounts to have been actually expended    

By the holder of an office or an employee In respect of expenses actually incurred or to be incurred On personal subsistence and incidental costs While, by reason of the duties of employment or office, the taxpayer is obliged to spend at least one night away from his usual place of residence.

This deeming provision falls away if the recipient proves the expenses actually incurred exceeds the deemed expenditure. The recipient is deemed to have expended the following amounts:   

R286 per day if that allowance is paid or granted to defray the cost of meals and incidental expenses R88 per day to defray the costs of incidental subsistence expenses only Whatever amount the Commissioner may allow for travel outside the Republic, varies per country. This amount applies to periods spent outside the Republic not exceeding six continuous weeks.

7. Allowances to Public Officers Where an allowance has been given to a public officer to defray expenses incurred by him in connection with his public office, section 8(1)(a) deems the allowance to have been actually expended by him.

KEY KNOWLEDGE 8. Seventh Schedule Benefits An employee is deemed to have been granted a taxable benefit by his employer in respect of his employment if one of the specified types of benefits is bestowed upon the employee:  

As a benefit or advantage of or by virtue of his employment or As a reward for services rendered or to be rendered by him to his employer

An ‘employer’, for the purposes of this Schedule is defined as any person who pays or is liable to pay to any person any amount of remuneration including: 

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Any company and

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

The State

An ‘employee’ means, in relation to an employer 

  

A person who is an employee in relation to a particular employer i.e. someone to whom the employer pays remuneration from which employee’s tax will usually be deductible any labour broker any personal service provider Any director of a private company.

‘Employment’ means any office or employment.

KEY KNOWLEDGE 9. Assets acquired at less than the actual value A taxable benefit arises in terms of paragraph 2 (a) where:    

An employee acquires From his employer, his employer’s associated institution or any person by arrangement with his employer An asset consisting of any goods, commodity, marketable security or property of any nature other than money Either for no consideration or for a consideration given by him that is less than the value of the asset

No taxable benefit will arise under this paragraph when the employee has been provided with a meal, refreshment, voucher, board, fuel, power or water or where the employee acquires a marketable security by the exercise of a right under section 8A, qualifying equity shares per section 8B (BBE) and equity instruments per section 8C (employee shares and share options). The cash equivalent is:     

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The market value of the asset at acquisition, or Cost to employer if the asset is movable property which was acquired by employer to give to the employee, or The lower of cost or market value, if trading stock, Less Any consideration given by the employee, Equals Amount taxed in employee’s hands

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

The value of the asset is usually its market value at the time it is acquired by the employee except: 

 

Movable property acquired by the employer specifically for the employee will be valued at cost except where market value is used i.e. marketable securities and where the employer had prior use of the asset before acquiring it e.g. Financial lease Trading stock is valued at the lower of cost or its market value Where an asset (other than money) is presented to an employee as an award for bravery or long service, its value must be reduced by the lesser of the cost to the employer or R5 000 i.e. the first R5 000 is exempt from tax in the hands of the employee.

10. Use of sundry assets A taxable benefit arises where an employee has been granted the private or domestic use of an asset either free of charge or for a consideration payable by him that is less than the determined value of the use (paragraph 2 (b)) This relates to the use of assets other than residential accommodation and motor vehicles. The cash equivalent of the value of the taxable benefit is the rental paid by the employer – if leased. If owned the cash equivalent is:   

15% per annum multiplied (X) by the lesser of the cost to the employer and the market value at the commencement of the period of use multiplied (X) by the number of months used divided by 12

When an employee is given the sole right of use for all or the major useful life of the asset, the full cost price to the employer will be taxed in the employee’s hands as a taxable benefit on the date that the use was first granted.

10.1 Exclusions   

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Where the employee’s private or domestic use of an asset is incidental to the use of the asset for the purposes of the employer’s business If the asset is provided by the employer as an amenity to be enjoyed for recreational purposes The asset is a machine or a piece of equipment that the employer allows his employees in general to use provided that the value of the private or domestic use is negligible

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

 

The asset consists of a telephone or computer used mainly for business purposes The asset consists of books, literature, recordings or works of art.

KEY KNOWLEDGE 11. Use of Motor Vehicles A taxable benefit arises where an employee is granted the right to use a motor vehicle, which is owned by the employer, for private purposes. Private use includes travelling between the employees place of residence to his place of work. The cash equivalent of the taxable benefit is:  

The value of private use as determined under paragraph 7, less Any consideration given by the employee to the employer for the use of the motor vehicle during that period

Determined value means: 

 

Where the motor vehicle was acquired by the employer under a bona fide agreement of sale or exchange concluded at arm’s length, the cost excluding finance charges, interest, and VAT Where the vehicle is held under a lease or was held under a lease and acquired at the termination of the lease, the retail market value at the time the employer first obtained the right of use of the vehicle, or the cash value in terms of the VAT Act. In any other case, the market value (excluding VAT) of the motor vehicle at the time when the employer first obtained the vehicle or the right of use thereof. A reduction in the determined value of the vehicle applies where the employer acquired the vehicle not less than twelve months before the employee was granted the right of use. A depreciation allowance equivalent to 15% calculated on the reducing balance method is available.

Where an employee has the right to use more than one vehicle, and he does not use each primarily for business purposes, the taxable benefit is:  

3,5% per month of the determined value of the vehicle having the highest determined value 3,5% per month of the determined value of every other motor vehicle

Which may be reduced to 3,25% provided the vehicle is subject to a maintenance plan at the time of acquisition of the vehicle by the employer.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

If the vehicle is used for part of a month, apportion on a daily basis.

11.1 Exclusions The private use will have no value if:    

The vehicle is available to and is used by employees in general Private use is incidental or infrequent Vehicle is not normally kept at or near the residence of the employee when not in use or outside business hours The nature of the employee’s duties are such that he is regularly required to use the vehicle for the performance of his duties outside his normal hours of work, and he is not permitted to use such vehicle for private purposes except for travel between his place of residence and place of work.

12. Meals, Refreshments and vouchers (paragraph 2 (c)) A taxable benefit arises when an employee has been provided with a meal or refreshment or with a voucher entitling him to a meal or refreshment either free of charge or for a consideration less than its value. The value is the cost to the employer.

12.1 Exclusions Certain meals and refreshments have zero value:     

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a meal or refreshment supplied by an employer in a canteen, cafeteria or dining room operated by or on behalf of the employer and patronised by the employees A meal or refreshment supplied by the employer during business or extended business hours A meal or refreshment supplied by an employer to an employee on the business premises of the employer A meal or refreshment supplied by the employer on a special occasion A meal or refreshment enjoyed by the employee in the course of providing a meal or refreshment to someone whom he was required to entertain on behalf of his employer

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

KEY KNOWLEDGE 13. Residential Accommodation Residential accommodation provided by an employer either free of charge or for a consideration that is less than the rental value gives rise to a taxable benefit (paragraph 2(d)). The residential accommodation may be:   

Furnished or unfurnished With or without meals With or without power and water

Cash equivalent is:  

Its rental value for the year of assessment, less Any rental consideration given by the employee for the accommodation and any household goods supplied with the accommodation and any charge made to him by the employer for power or fuel supplied with the accommodation for that year

The calculation of rental value depends on whether or not full ownership of the accommodation vests with the employer or an associated institution. If full ownership vests in the employer or associated institution: 

Rental value determined in accordance with the formula below

If full ownership does not vest with the employer or associated institution:  

Rental value is determined by the formula (below), or The total amount paid by the employer for the accommodation in the form of rentals or other expenditure

13.1 The Formula The value of residential accommodation is calculated by using the formula only in the following circumstances. 

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The full ownership of the accommodation vests in the employer or an associated institution and the employee does not have an interest in the accommodation; or

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Full ownership does not vest in the employer or an associated institution and it is customary for the employer in the industry concerned to provide free or subsidised free or subsidized accommodation:(i) for the proper performance of employees duties (ii) as a result of the frequent movement of employees (iii) as a result of the lack of employer owned accommodation

 

the benefit is provided solely for bona fide business purposes AND the employee does not have an interest in the dwelling.

The formula for determining the rental value is: (A – B) X C X D 100

12

Where:

A = remuneration, As defined in the Fourth Schedule, derived by the employee in the preceding year of assessment     

Including amounts paid to a director for services rendered or as director’s fees whether paid by the employer or associated institutions in relation to the employer Excluding the taxable benefit from the use of a motor vehicle or occupation of residential accommodation Excluding travel allowances Excluding entertainment allowances Excluding remuneration from an associated institution if the employee is not one of the controlling shareholders of the employer company and the

Commissioner is satisfied that the employee’s employment with the employer is not and was not in any way connected with the employee’s employment with such associated institution If the employee was only employed by his current employer for part of the preceding year, ‘A’ will be his first month’s remuneration, divided by the number of days of the month multiplied by 365 days.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

B = R59 750 In the following situations B is nil 

Where the employer is a private company controlled directly or indirectly by the employee or his spouse. This provision applies even if the employee is only one of the persons controlling the company; or Where the employee or his spouse or his minor child has a right of option or preemption whereby any of them may become the owner of the accommodation whether directly or indirectly by virtue of a controlling interest in a company or otherwise. This right must be granted by the employer or by another person by arrangement by arrangement with the employer or by any associated institution for this restriction to apply.

C = 17; 18 or 19 C = 19 If the accommodation consists of a house, flat or apartment consisting of at least 4 rooms is furnished and the employer supplies power or fuel C = 18 If such accommodation is unfurnished and power or fuel is supplied by the employer, or is furnished but power and fuel are not supplied by the employer C = 17 In all other circumstances D = the number of months in the year of assessment during which the employee was entitled to occupation of the accommodation. Where the employer rents the accommodation or the employee owns the accommodation and rents it to the employer the value of the rental is deemed to be the greater of:  

The total amount of rentals and other costs payable by the employer or associated institution in respect of the accommodation or The rental value as determined by the formula.

13.2 The Modified Formula Used in two situations:

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

(1) Where the employer is a private company and the employee or his/her spouse controls the company or is one of the persons controlling the company (2) The employee, or his spouse, or minor child has the right of option or pre-emption granted by the employer by arrangement whereby the employee, his spouse, or minor child may become the owner of the accommodation either directly or indirectly. B = NIL

14. Holiday Accommodation The cash equivalent of the taxable benefit arising from accommodation occupied temporarily for the purposes of a holiday is determined as the rental value of the accommodation less any consideration given by the employee. The rental value is: 

The cost of the accommodation borne by the employer where the accommodation is hired by the employer (including amounts chargeable for meals, refreshments or services relating to the accommodation). The prevailing rate per day at which the accommodation could normally be let to a person who is not an employee.

15. Deemed Housing Loans Where the employee has a right to acquire residential accommodation at a future date in terms of an agreement entered into with the employer, the employee is deemed to have been granted a loan equivalent to the agreed-upon purchase price. (paragraph 10A) The taxable benefit is the difference between the interest on the loan at the official interest rate and the rental paid by the employee.

16. Free and Cheap Services (Para 2(e) and 10) Benefit (paragraph 2 (e)) 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 benefit arises where the service has been provided free or for a reduced consideration.

Cash Equivalent – (paragraph 10)

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

If a service is rendered to an employee, the reward is taxed as follows:  

The amount of the lowest fare, or The cost to the employer of rendering the service

Services relating to residential accommodation, medical services and payment to insurers for the benefit of employees are excluded from this taxable benefit.

16.1 Exclusions No value will be placed on: 

 

 

Any travel facility granted by an employer who is engaged in the business of conveying passengers for reward by land, sea or air to enable any employee or the employee’s spouse or minor child to travel to any destination in the Republic or to travel overland to any destination outside the Republic, or to any destination outside the Republic in the ordinary course of the employer’s business and the employee was not allowed to make a firm advance reservation A transport service by an employer to convey employees between their home and work Any service rendered by an employer at work to help employees perform their duties better, or any recreational facilities, or any service as a benefit to be enjoyed at work. Any telephone or communication service provided if the service is used mainly for business purposes Any travel facility provided by an employer to the spouse or minor child to travel between the employees normal place of residence and the business place where the employee is stationed if the employee is stationed more than 250 km away and is required to spend more than 183 days of the year away from home

17. Low- Interest Loans (paragraph 2(f) and 11) A taxable benefit arises when a loan has been granted to the employee:  

Either by the employer or any other person by arrangement with the employer or by arrangement with an associated institution in relation to the employer. With no interest being payable by the employee, or with interest at a rate lower than the official rate of interest.

‘Loan’ includes any form of credit and any loan applied directly towards the replacement of another loan. The Minister of Finance fixes the official rate of interest.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

17.1 Exclusions Certain loans give rise to taxable benefits having zero value: 

A casual loan or a series of casual loans granted by an employer to his employee, as long as the loan or the sum of the loans does not exceed R3 000 at any relevant time. ‘Casual loan’ is defined as a short-term loan granted at irregular intervals with a limit of R3 000. A loan granted by an employer to his employee for the purpose of enabling the employee to further his own studies.

18. Housing Subsidies (Para 2(g), 2 (gA) and 12) Two taxable benefits are defined in relation to subsidies: 1. A subsidy paid by an employer in respect of the interest or capital repayments payable by the employee in terms of a loan. The cash equivalent of the value of the taxable benefit is the amount of the subsidy. 2. A subsidy paid by an employer to the lender who has granted the employee the loan, if the sum of the employer’s subsidy and the interest paid by the employee on the loan exceeds the amount of interest that would have been payable on the loan using the official rate of interest.

19. Discharge or Release of Obligation (paragraph 2(h) and 13) A taxable benefit arises when the employer has:  

Paid an amount owing by the employee to any third person without requiring the employee to reimburse him Released the employee from an obligation to pay an amount owing by the employer to the employee.

The cash equivalent derived by reason  

of the payment of an employee’s debt by an employer will be the amount paid by the employer of the employee’s release from an obligation to the employer will be the amount owing

Exclusions

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

 

 

Employee’s subscriptions paid by an employer to a professional body, membership of which is a requirement of the employee’s employment. Insurance premiums paid by the employer indemnifying an employee solely against claims relating to the rendering of services by the employee on behalf of the employer The value of the benefit paid by a ‘former member of a non-statutory force or service’ to the ‘Government Employees’ Pension Fund’ Where a bursary, study loan or similar assistance was granted to an employee who assumed obligation to work for the employer for a specified period of time, but before the expiry of this term employment was terminated with the first employer and the obligation was settled by the new employer.

20. Medical Aid Contributions (paragraph 2(i) and 12A) A taxable benefit arises where an employer makes any contribution or payment to a medical aid scheme for the benefit of the employee or dependents of the employee. The cash equivalent is included in the employee’s remuneration for the purposes of calculating employees tax. Exclusions No value is placed on the taxable benefit from an employer by:    

A person who retired from that employment by reason of superannuation, ill-health or other infirmity The dependents of a deceased employee who was in employment at the date of death, or The dependents of a former employee who has retired by reason of superannuation, ill-health or other infirmity A person over the age of 65

20.2 Costs relating to medical services Paragraph 2(j) provides that a taxable benefit arises when an employer has directly or indirectly incurred an amount in respect of any medical, dental or similar services; hospital services; nursing services; or medicines provided to an employee, spouse, and child, relative or dependent. Cash equivalent – the amount incurred unless the amount cannot be attributed to a particular employee. Exclusions

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

 

 

Treatment listed as prescribed minimum benefits to an employee, spouse or children Benefits derived by a person who retired by reason of ill-health, infirmity or age; dependents of a dead employee; dependents of a deceased retired employee; a person entitled to the over-65 rebate General services rendered to employees at their place of work for better performance of their duties Any medical benefit where the services are rendered or medicines supplied to comply with any law in the Republic

21. Taxation of directors and employees at the vesting of Equity Instruments (s8C) Any gains made by a director or employee by virtue of the exercise, cession or release of a right to acquire a marketable security is included in gross income only if this right was obtained before 26 October 2004. Section 8C taxes an equity instrument when it vests in a director or an employee. The amount of any gain determined in respect of the vesting of an equity instrument is included in remuneration and subject to employees tax. CONCLUSION Fringe benefits increase remuneration unlike allowable deductions which have the effect of decreasing income. Fringe benefits are applicable to individual taxpayers only and not to corporate concerns.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 8

Employees Tax and Provisional Tax

Introduction Employees’ tax is divided into ‘Standard Income Tax on Employees’ (SITE) and ‘Pay as you Earn’ (PAYE). Employers withhold the tax due from the employee in terms of the Fourth Schedule of the Income Tax Act 58 of 1962. This monthly deduction is referred to as ‘employees’ tax’ and the employer has to divide this amount into SITE and PAYE.

1. Remuneration Defined in para 1 as the income that is paid or payable by way of salary, wages, leave pay, overtime pay, bonus, gratuity, commission, emolument, pension, superannuation allowance, retiring allowance or stipend, in cash or otherwise and whether or not for services rendered.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

KEY KNOWLEDGE 2. Employees Tax Employees’ tax consists of Pay as you earn (PAYE) and Standard Income Tax on Employees (SITE). Any employer, resident or non-resident, who pays ‘remuneration’ to an employee must on a monthly basis withhold employees’ tax. The amount of employees’ tax is calculated by using the tax tables taking into account the rebates. To the extent that an employee’s remuneration is not ‘net remuneration’ or exceeds the amounts subject to SITE it will be subject to PAYE. The amount of employee’s tax to be withheld is calculated on the ‘balance of remuneration’ after deducting:   

Qualifying contributions made by an employee to a pension or retirement annuity fund Contributions to a medical scheme under s18. Any donation made by the employer on behalf of the employee that does not exceed 5% of the remuneration

Part-time, Temporary and Casual Employees These employees are not standard employment and employees’ tax must be deducted at a flat rate of 25%. Examples of part-time remuneration:     

Workers paid on a daily basis but whose remuneration exceeds the daily limit of R261 Casual commissions e.g. spotter’s fees Casual payments for irregular or occasional services rendered Fees paid to part-time lecturers Honoraria paid to office-bearers of organisations or clubs

KEY KNOWLEDGE 3. Directors of Private Companies As from 01 March 2002 directors of private companies are included in the definition of employee and any amounts paid to them are included in the definition of remuneration.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Private companies and close corporations have to withhold employee’s tax from amounts paid to directors. The tax withheld will be PAYE. Section 11C provides for the calculation of deemed monthly remuneration for directors.    

Every director of a private company Is deemed to have received from that company During any month An amount of remuneration determined in accordance with the following formula

Y=T/N Where Y = the deemed monthly remuneration T = the remuneration (after pension and RAF deductions) paid or payable to the directors by the company in the last year of assessment which ended before that month excluding any amounts contemplated in paragraphs (d), (e), or (f) of the gross income definition or any gain made on the exercise of a share option N = The number of completed months that the director was employed by that company during the last year of assessment. Where remuneration for the last year of assessment has not been determined, the preceding year’s remuneration is used and inflated by 20%. Employee’s tax is withheld on the greater of actual or deemed remuneration. The ‘deemed remuneration’ provision will not apply a director of a private company, who, in the last year of assessment, derived more than 75% of the balance of remuneration in the form of fixed monthly remuneration.

KEY KNOWLEDGE 4. Provisional Tax Taxpayers are required to make advance payments on their estimated liability for normal tax in a particular year of assessment. There are two methods of making these payments: 

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Provisional tax payments made in advance on the estimated liability for normal tax for a particular year made on taxable income other than ‘remuneration’ as defined.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Employers are required to withhold employees’ tax from remuneration paid to an employee.

Two obligatory estimates are made for each year of assessment. First payment On or before the last day of the sixth month of the year of assessment Second payment made on or before the last day of the year of assessment A voluntary third payment may be made seven months after the end of the year of assessment

All individual taxpayers have a February end and a time-line is used to illustrate the payment of provisional tax. For corporate entities that do not have a February year end, the voluntary payment is due six months after the second payment.

2012 year of assessment (01 March 2012 to 29 February 2013)

First payment

31 August 2012

Second payment

28 February 2013

Voluntary Payment

30 September 2013

The first and second payments are compulsory payments calculated according to the following rules: FIRST PAYMENT

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Half of the tax payable (based on the estimated or basic amount)

Less: any employees tax already deducted

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Less: certain amounts of foreign tax paid on income from sources outside the Republic that are allowed as a rebate

SECOND PAYMENT 

The full amount of tax payable for the year (based on an estimate)

Less: the first payment

Less: any employees tax already deducted

Less: certain foreign tax credits

The first two payments are obligatory but the third is a voluntary payment calculated on actual taxable income. If the taxpayer is an individual, the primary and/or secondary rebates need to be considered. A provisional taxpayer is defined as:   

A person who derives income that does not constitute ‘remuneration’ as defined a company any person who notifies the Commissioner that he is a provisional taxpayer

A taxpayer will be liable for interest if the payment is made more than six or seven months after the end of the year of assessment (depending on the taxpayer status), or will be entitled to interest if the provisional tax payments exceed the assessed liability for the year.

Exempt Entities The following are exempt from provisional tax payments:

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Non-resident owners or charterers of ships and aircraft who fall under s 33

A natural person under the age of 65 whose taxable income does not exceed the tax threshold, or his passive income i.e. interest, dividends and rental does not exceed R20 000

A natural person over the age of 65 whose taxable income does not exceed R120 000 or is not derived from carrying on a business

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Late Submission or Under submission of Provisional Tax Interest, penalties and additional taxes become payable where estimates of provisional tax are:  

Incorrect, or Not made on the last day of the prescribed payment period

Interest Section 89bis(2) provides for the payment of interest when provisional tax is not paid in full within the prescribed period. Interest is paid at the prescribed rate and is calculated on the unpaid amount for the period during which it remains unpaid. Section 89quat provides for payment of interest by and to qualifying provisional taxpayers. Voluntary payments made between year-end and the effective date will:  

Avoid s 89quat interest, and No s 89bis interest will be charged

Voluntary payments made between the effective date and the assessment date will:  

Avoid s 89quat interest, but Will attract s 89bis interest after the effective date

Penalties A substantial penalty of 20 % could be imposed based on two tiers: 

Small taxpayers – automatic penalty of 20 % if the estimate for the second period is less than the basic amount and 90% of the actual taxable income for the year of assessment. Large taxpayers – taxable income that exceeds R1 million, a discretionary penalty of up to 20 % will be imposed if the taxable income for the second period is less than 80% of the actual taxable income.

Additional Tax Year-End Estimate late – an additional penalty of 20% on the outstanding amount, imposed when the estimate is not submitted on time.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 9

Retirement and Lump Sum Benefits

1. Applications of the Act Sections of the Act, which are relevant to the amounts received on retirement, death or resignation are:  

Section 01 – gross income definition – para (d), ( e), (eA) and (f) The Second Schedule, of the Income Tax Act 58 of 1962

Lump sums can be divided into:  

Lump sums from employers, where the gross amount received is included in gross income, and Lump sums from funds, where the net amount i.e. the gross amount less the allowable deduction in terms of the Second Schedule, is included in gross income

Lump sum from Employer Lump sums received from an employer : 

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are included either in terms of s1 para (d) or para (f)

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

must meet the definition of ‘severance benefits’ before it can be taxed in terms of the new table applicable to severance benefits

Severance benefits: includes any amount, other than a lump sum received from a fund, received by or accrued to a person by way of a lump sum from an employer or associated institution in respect of termination, relinquishment, loss, repudiation, cancellation or variation of office or employment if:   

the employee has attained the age of 55 years, the relinquishment, termination, variation, loss, repudiation, or cancellation is due to permanent incapacity due to sickness, accident or injury, or the termination or loss is due to the employer ceasing or intending to cease operations or the employee has become redundant in consequence of a general reduction of personnel or of a particular class of personnel.

If the employee is or was at any time a shareholder who held more than 5 % of the issued share capital or members’ interest in the company , any amount received will not fall into the definition of ‘severance benefit’.

Calculation of Tax on Severance Benefit The rate of taxation of severance benefit amounts are as follows: Taxable income from severance benefits Not exceeding R315 000 Exceeding R315 000 but not R630 000 Exceeding R630 000 but not R945 000 Exceeding R945 000

Rates of Tax 0% of taxable income 0% plus 18% of taxable income exceeding R315 000 R56 700 plus 27% of taxable income exceeding R630 000 R141 750 plus 36% of taxable income exceeding R945 000

Commutation of amounts due under para (f) of gross income Any amount received or accrued in commutation of amounts due under a contract of employment or service must be included in gross income. Commutation means substitution, resulting in e.g. an employee who commutes the right of a lunch break for a cash payment will have the payment included in gross income for that year of assessment. Para (f) can also be seen as severance benefits if the requirements of the definition are met.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Fund Benefits (para ( e) of gross income and Second Schedule Para ( e) of the definition of gross income includes any retirement fund lump sum benefit or retirement fund lump sum withdrawal benefit but excludes any amount included under para (eA). The Second Schedule defines a lump sum as: 

an amount determined by the commutation of an annuity or portion of an annuity payable by or provided inconsequence of membership or past membership of a fund, and any fixed or ascertainable amount other than an annuity payable by or provided in consequence of membership or past membership of any fund

The Second Schedule draws a distinction between a benefit derived by a taxpayer who:  

retires from a fund or dies (retirement lump sum) resigns or withdraws from a fund (retirement lump sum withdrawal benefit or a preretirement lump sum)

Tax implications are determined by the type of event and not the type of fund. The only exception is the public sector pension fund (PSPF). Five types of funds are affected by the provisions of the Second Schedule: Pension funds (PF); pension preservation funds (PPF); provident funds (PF2); provident preservation funds (PPF2) and retirement annuity funds (RAF) The actual lump sum received from the fund is not included in the individual’s gross income, the taxable portion is included.

Retirement Fund Lump Sum Benefits Permissible deductions in terms of para 5 and 6 are:     

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taxpayer’s own contributions to any fund which were not allowed as a deduction under s 11(k) or (n); and any amount transferred for the benefit of the taxpayer to another fund in terms of a divorce order any amount transferred for the benefit of any person to any fund, which amount is deemed to have accrued on the date of transfer any unclaimed benefit previously taxed and transferred to a PPF or PPF2, and the exempt portion of any lump sum transferred to a fund from PSPF, as determined by formula C

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Formula C expressed as: A= B/C x D Or Potential taxable amount (A)

=

Years of service after 1 March 1998

x

Lump

sum Total years of service

Retirement Fund Lump Sum Withdrawal Benefits This may comprise any amount that is:   

assigned to a person in terms of a divorce order granted on or after 13 September 2007 transferred for the benefit of that person to any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund of which the person was previously a member received by or accrued to that person by way of a lump sum benefit from or in consequence of past membership of any PF, PPF, PF2, PPF2, RAF

LESS: any deductions permitted under the provisions of para 6

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 10

Special Deductions and Allowances

List Syllabus Reference Introduction This chapter deals with special deductions and allowances granted to individuals and businesses. It highlights the relevant sections of the Act and provides knowledge for the application of computation of deductions and allowances for individuals and businesses.

KEY KNOWLEDGE 1. Special Deductions Section 11 Section 11(a) dealt with the general deduction formula and the specific rules that govern this section.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Special deductions are set out in section 11(bA) to 11(x) and 11A, 11B, 11C and 11D and are meant to enlarge on the general deduction formula. Section 23 prohibits the deduction of certain expenditure and losses. Special deductions permit deductions that would not be deductible under the general deduction formula, either because they are of a capital nature or are not incurred in the production of income.

2. Double Deductions Section 23B This section allows for a deduction or allowance to be allowed only once in determining taxable income. It also provides that no deduction will be allowed under section 11(a) if the deduction is dealt with under a specific section.

KEY KNOWLEDGE 3. Limitation of Deduction – Section 23H Section 23H limits the amount of certain deductions that may be claimed in a particular year of assessment. It is aimed at pre-paid expenses.

Section 11(c) Legal Expenses Legal expenses not incurred in the production of income are not allowed in terms of section 11(a). Section 11(c) allows for the deduction of certain types of legal expenses not allowed by s11(a). Deductions of the following legal costs are allowed:      

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Fees for legal practitioners Expenses incurred in order to procure evidence Court fees Taxing fees, witness fees and expenses Costs of sheriffs and messengers of the court Any other similar costs.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

However, the deduction must be:     

Actually incurred by the taxpayer in the year of assessment In respect of an action, claim or dispute Incurred in the course of, or by reason of, ordinary operations in carrying on trade Not of a capital nature Provided that the expenditure was incurred to prevent a claim for compensation or damages which are deductible under s 11(a) or if the deduction was in respect of a claim for payment, the amount must constitute ‘income’

Section 11(cA) Restraint of Trade Payments incurred on or after 23 February 2000 Allowance in respect of:   

Amount actually incurred by a person In the course of carrying out his trade As compensation in respect of any restraint of trade imposed on any person who is a natural person, or a labour broker, or a personal service company, or a personal service trust. To the extent that the amount constitutes or will constitute income of the person to whom it is paid.

Deducted over the period to which it relates or over a minimum period of three years or over the period of the restraint. Section 23(l) prohibits the deduction of restraint of trade payments except as provided for by section 11(cA). The amount is not apportioned if it is incurred at any time during the year.

Section 11(d) Repairs Deduction from income, expenditure actually incurred during the year of assessment on repairs to property occupied for the purpose of trade or from which income is receivable or for the purpose of repairing machinery, implements, utensils and other articles or for the beetle treatment of timber forming part of the property. There is no definition in the Act.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

According to the Shorter Oxford English Dictionary, repair is: ‘Restoration of some material thing or structure by the renewal of decayed or worn-out parts, by fixing what has become loose or detached’.

Section 11(e) Wear and Tear Allowance Section 11( e) allowance will be available if:    

the value of any machinery, plant, implement, utensil or article owned by the taxpayer or acquired by the taxpayer in terms of an instalment sale agreement, and used for the purposes of trade has diminished by reason of wear and tear or depreciation during the year of assessment.

This section does not apply if a special depreciation allowance under S12B or S12C is available. Wear and tear allowance is part of the annual write-off of part of the cost or value of the asset.           

Depreciation amount Commissioner considers value diminished used for purposes of trade cash cost none if S12B and S12C are applicable allowed on qualifying foundation or structure not for buildings or permanent works reduced by S8(4)(a) recoupment increased by moving (provided not claimed under S11(a)) can be claimed only on assets that do not qualify for other allowances has to be apportioned for the period it was used in the taxpayer’s trade

Section 11(f) Lease Premiums Provides for an allowance for a premium or consideration in the nature of a premium paid by a taxpayer for the:

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

    

Right of use or occupation of land and buildings used or occupied for the production or income or from which income is derived Right of use of plant or machinery used for the production of income or from which income is derived Right of use of motion picture film or any sound recording Right of use of a patent, design, trademark or copyright used for the production of income or from which income is derived Imparting of or the undertaking to impart any knowledge directly connected with any of the above bullet points

Used in the production of income or from which income is derived. Allowance :    

Commencing in the first year Deductible in equal instalments Based on the period of the lease (limited to 25 years) Apportioned for part of a year.

Recoupment On the sale or disposal of this right, the taxpayer will have to include an amount in income. This represents a recovery or recoupment of previously granted allowances (section 8(4)(a)).

Section 11(g) Leasehold Improvements When a lessee is obliged to effect improvements in terms of a lease agreement, the lessee can deduct the expenditure actually incurred as follows:       

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Annually Spread over the period of the initial lease or 25 years (whichever is shorter) Reduced for a partial year Commencing when the improvements are completed Provided that the land or buildings are occupied or used by the lessee for the production of income. Deduction may not be claimed if it does not constitute income in the hands of the lessor If the lease agreement has been terminated the lessee may deduct the balance of the cost of the improvements not previously deducted

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Lessee can deduct the stipulated value or a fair and reasonable value if one is not stipulated. If the lessee spends more than the stipulated amount, the difference can be deducted under section 13 of the Act. If the lessee spends less than the stipulated amount, the actual amount spent must be utilized in the calculation. The provisions do not apply is the improvements do not constitute income of the lessor.

Section 11(h) Lessors A deduction, considered reasonable by the Commissioner, is allowed as a deduction from lease premiums or improvements. Where a lessor has a right to have improvements made to his property, but does not benefit from its use immediately, the Commissioner may grant the lessor an allowance. Practice is to give the lessor a deduction equal to the difference between the amounts of those improvements discounted at 6% over the period of the lease, excluding any renewal periods. No deduction granted if the lessee or the lessor is a company and the other party holds more than 50% of any issued class of share or if a third person holds more than 50% of any class of share of the lessor or lessee. The allowance will be: The amount included in gross income Less:

the present value of the amount included in the lessor’s gross income

Equals

special lessor’s allowance

Section 11 (gB) Registration and Renewal of Intellectual Property Allows a deduction in full in respect of expenditure actually incurred in:  

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Obtaining the grant of any patent Restoration of any patent

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

     

Extension of the term of any patent Registration of any copyright Extension of the term of any copyright Registration of any design Extension of the registration period of any design Renewal of the registration of any trademark

If such property is used in the production of income or income is derived therefrom.

Section 11 (gC) Acquisition of Intellectual Property The taxpayer is allowed a deduction of: 

Expenditure actually incurred to acquire any invention or patent, any design, any trademark, copyright or similar property, any knowledge in respect of any of the above property that is used in the production of income. The deduction is allowed in the year of assessment in which the property is brought into use for the first time by the taxpayer for purposes of his trade.

Limited to:  

Less than R5 000 – deducted in full in the year incurred Exceeds R5 000 the allowance is: 5% of expenditure, per annum, in the case of patents, copyrights or similar property 10% of expenditure, per annum, in the case of a design or similar property

No apportionment if less than a full year.

Section 11D Scientific and Technological Research and Development No definition of “research and development” If the taxpayer actually incurred expenditure (operational or capital) directly in respect of research and development towards the discovery, development or creation of any invention, design, computer program or knowledge and this is to be used in the production of income by the taxpayer, the following two types of deductions are available:

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

a 150% write-off of expenditure incurred directly for the devising, creating or developing an invention, computer program, or scientific or technological knowledge and is intended to be used by the taxpayer in the production of income.

If this research is funded by a third party (excluding government grants) the deduction is limited to 100%

If the research is funded by a government grant, the deductibility will be dependent on the taxability of the government grant

A 50%; 30%; 20% write-off of a cost of a building, part of a building, machinery, plant, utensil and brought into use for the first time by the taxpayer solely and directly for the production of income. The asset has to be new.

A new version of section 11D is applicable from 1 April 2012 (or a later date as determined by the Minister in a Notice in the Government Gazette).

Section 11(i) Bad Debts This section permits the deduction of the amount of any debts due to a taxpayer from income earned. Bad debts deduction allowed if:   

Debts are due to the taxpayer Have during the year of assessment become bad, and In respect of amounts which have been included in the taxpayer’s income in the current or any previous year of assessment.

All three conditions must be fulfilled.

Section 11(j) Doubtful Debt Allowance Deduction of such amount as the Commissioner considers represents doubtful debts. The taxpayer must provide the Revenue Services with a list of all doubtful debts and the allowance is usually allowed not exceeding 25% of this list. Or The doubtful debt allowance is calculated based on a special formula.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

 

Where a detailed list is provided, it is used as a basis in determining the amount regarded as doubtful. The amount deducted in the year in which it is considered doubtful must be added back in the following year. If the debt has gone bad it will then be deducted under s 11(i). The Commissioner usually allows a deduction of 25% of the list of doubtful debts. The formula applied by the Commissioner is not set out in the Act, but is applied as Revenue practice

Y=MXN Where Y = the doubtful debt allowance M=a–b X 1 5

c

N = the total debtors at the end of the year of assessment, after providing for bad debts a = the total bad debts written off for the current and preceding four years b = the total bad debts recovered for the current and preceding four years c = the annual average credit turnover for the current and the preceding four years.

Section 11(k) Pension Funds Current contributions This deduction is granted to an employee, a holder of office or a partner (who was an employee before becoming a partner) who makes current contributions to a pension fund by reason of employment or holding of office. Deduction is the greater of:  

R1 750 7,5% of remuneration from retirement funding employment

Any disallowed portion may not be carried over to the succeeding years of assessment.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Retirement funding employment is defined in section 1 and refers to the employment or holding of office in respect of which the employee or office holder derives remuneration that is taken into account in determining the contributions made to a pension or provident fund.

Arrear Contributions That is, where service is bought back is allowed up to a maximum of R1 800 per person, per annum. Any excess may be carried over to the following year of assessment and be deducted subject to the limit. Arrear contributions may also be deducted from non-trade income (e.g. interest, dividends, annuities)

Section 11 (l) Contributions by an employer to pension, provident and benefit funds Any employer may deduct contributions made on behalf and for the benefit of employees to any pension, provident or benefit fund subject to:  

if the contribution is a lump sum payment, the Commissioner may allow the deduction in annual instalments. If the contributions per employee exceed 10% of the approved remuneration of the employee and the Commissioner feels that such contribution is excessive, he may disallow any portion of the deduction as exceeds 10% of approved remuneration.

Approved remuneration – so much as the Commissioner considers fair and reasonable in relation to the value of the employees services. For the purposes of this section, a partner in a partnership will be deemed to be an employee of the partnership.

Section 11 (lA) Shares issued by Employers in terms of s 8B Allows for a deduction by the employer of:

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Market value of any qualifying equity share granted in terms of s 8B

Less: any consideration paid by the employee

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Limited to a maximum of R10 000 per year

Section 11 (n) Retirement Annuity Contributions Current Contributions Allowed subject to certain limitations. Amount that may be deducted is the actual contribution limited to a maximum of the greatest of:   

15% of income from non-retirement funding after setting off any losses and deducting admissible deductions and allowances. R3 500 less any amount allowed in terms of s 11(k) R1 750.

Any disallowed portion may be carried forward to the next year of assessment, subject to the limits. Arrear contributions may be deducted up to a maximum of R1 800 per year of assessment.

Section 11(m) Annuities paid to former employees and their dependents This section allows for the deduction of annuities paid by a taxpayer during a year of assessment. Annuities paid to former retired employees An employer may deduct in full an annuity paid to a former employee, each year, provided that the employee retired on the grounds of ill health, old age or infirmity. There is no limit to the amount that may be deducted. Annuities paid to dependants of former employees A deduction is allowed to the dependents of a former retired or deceased employee, irrespective of the number of dependents. Annuities paid to former partners

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

A taxpayer may deduct an annuity paid to a former partner who has retired on the grounds of ill-health, old age or infirmity subject to the following conditions:      

The retired partner must have been a partner for at least five years Who retired from the partnership on the grounds of old age, ill health or infirmity Annuity amount must be reasonable in the light of his services as a partner Annuity amount must be reasonable in the light of profits earned by the partnership Payment must not be in lieu of any other interest, such as goodwill It must be a genuine annuity.

Section 11 (nA) and (nB) Repayment of Employee Benefits Section 11 (nA): If an employee refunds any amount, received in respect of services rendered (or voluntary award), the payment will be allowed as a deduction against income. Section 11 (nB): If an employee refunds a restraint of trade payment and the employee was taxed under s1 (cA), the employee can claim the refund as a deduction.

Section 11 (o) Scrapping Allowance Allowance available for qualifying assets used by the taxpayer in the purposes of his trade that have been scrapped by him during the year of assessment. The useful life of the asset must not exceed 10 years. The requirements are: 

Allowance available at the election of the taxpayer

for qualifying depreciable asset

that was alienated, lost or destroyed

During the year of assessment

If the asset has never been put into use, the allowance is unavailable. The deduction is not granted in respect of any asset with a useful life of more than ten years.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Section 11(o) will be disregarded if the full consideration of the disposal does not accrue in the year of assessment. The allowance will be allowed in a subsequent year of assessment. If Section 11(o) is elected the following calculation will be applicable: If

The cost of the asset

Exceeds

the sum of: the amount received or accrued from the alienation, loss or destruction (proceeds) AND the allowances or deductions allowed or deemed to have been allowed in respect of the asset in the current or any previous years of assessment

Section 11 (w) Life Insurance Premiums Premiums incurred before 1 March 2012 The employer qualifies for a deduction on: 

Premiums paid on insurance policies

If the employer is the policyholder and the policy is taken out on the life of a director or employee

From the income of a person carrying on trade in the Republic

Deduction may only be made from the income of the taxpayer for premiums paid under the policy of which the employer/taxpayer is the owner on the life of the employee/director. The allowance is limited to the amount of the premiums.

Section 11 (x) Other Deductions Brings into the scope of s 11 all other amounts allowed to be deducted from the income of the taxpayer in terms of any other provision in Part I of the Act, which deals with normal tax.

Section 11A Pre trade expenditure and Losses

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Applies in respect of any year of assessment ending on or after 1 January 2004. For the purposes of determining taxable income derived during any year of assessment from the carrying on of any trade A deduction is allowed of:      

Qualifying expenditure and losses actually incurred prior to the commencement of and in preparation for carrying on of that trade which would have been allowed as a deduction in terms of section 11 (other than s 11(x)) or section 11B, 11D or 24J had the taxpayer already commenced trading which were not allowed when they were incurred

Deduction is restricted to income from that trade.

4. Capital Allowances Section 12 C 20% or 33,3% or 40% straight line allowance Section 12C allows a deduction, based on the actual cost of any qualifying machinery, plant, implement, utensil, article, ship or aircraft. The rate of the allowance is:    

20%, or 33 1/3% in the case of new or unused machinery or plant Allowance will be allowed in full in the year of assessment during which the asset was brought into use and in each of the four or two succeeding years of assessment. Available only if the asset is brought into use for the first time by the taxpayer.

Section 12 B 50/30/20 allowance Farming or Production of Renewable Energy Currently available for: 

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machinery, implements, utensils or articles (not livestock) brought into use for the first time and used in carrying out farming operations

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

 

machinery, plant, implements, utensils or articles used for the production of biofuels assets brought into use for the purposes of trade in the generation of electricity from wind, sunlight, gravitational water forces and biomass

Allowance in the year of assessment in which the qualifying asset is brought into use and in each of the succeeding two years of assessment. The deduction is calculated on the cost of the asset to the taxpayer at a rate of 50% in the first, 30% in the second year and 20% in the third year. Granted in full in the first year (no apportionment). Only available if the asset is brought into use for the first time by the taxpayer. Not limited to new and unused assets.

Section 12 E Small Business Corporations Section 12E(4) defines a small business corporation as:      

any close corporation or private company the entire shareholding of which is held by shareholders or members who are natural persons the gross income does not exceed R14M for the year of assessment none of the members or shareholders holds any shares or interest in any other company not more than 20% of gross income consists of investment income and the income from the rendering of any personal service. Which is not an employment company.

The allowance applies to:      

Plant and machinery Owned by or acquired by the taxpayer under an instalment credit agreement Brought into use for the first time by the taxpayer On or after 01 April 2001 For the purpose of the taxpayer’s trade (other than mining or farming) Used by the taxpayer directly in the process of manufacture or similar process.

Deduction is 100% of the cost of the asset in the year that the asset is brought into use. Cost is defined as:

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

   

The lesser of the actual cost to the taxpayer or the direct cost concluded at arm’s length Cost of installation or erection is included Excluding interest and finance charges Cost is reduced by any recoupment not brought into income in terms of s 8(4) (e)

Costs of moving an asset, from one location to another, allowed in full. Section 12E(1A) provides that 

Non-manufacturing assets may be written off over three years (50-30-20).

There is no apportionment in the first year. The asset must be acquired on or after 1 April 2005.

Moving expenses: 

Any expenditure incurred in moving an asset from one location to another, not deductible under s 11(a), will be allowed for non-manufacturing assets in equal instalments in tat and subsequent years in which the deduction is allowable.

In any other case, deductible in full in the year it is incurred.

Section 13 quin Commercial Building Allowance  

  

Applicable to any building or improvements contracted for on or after 1 April 2007 If the taxpayer owns a new and unused building and the improvements were made wholly or mainly for producing income, in the course of the taxpayer’s trade excluding residential accommodation Allowance of 5 % per year on the cost of the building (or improvements) Not apportioned for part of the year Deduction can never exceed 100% of the cost

The cost of the building or improvement for s 13 quin is:  

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The lesser of : The actual cost or The direct cost under a cash transaction concluded at arm’s length on the date the transaction was concluded (market value) Unless: A part of the building was acquired on or after 21 October 2008, without the taxpayer erecting or constructing it, then the cost is: 55% of the acquisition price if a part is acquired; and

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

30% of the acquisition cost if an improvement part is acquired

Section 13 sex Residential Units Allows for an allowance to be claimed on residential units and improvements to the residential units that were acquired or erected on or after 21 October 2008. Applicable where a taxpayer:     

Owns a new and unused residential unit That unit or improvements are solely used for the purposes of trade Is situated in South Africa The taxpayer owns at least five residential units Excluding the provision of new and unused low cost residential units for occupation by employees who carry on a trade or mining

Allowance:  

5% deduction per year on new and unused residential units; AND an additional 5% of the cost if it is low-cost residential accommodation

No apportionment for part of a year. The total deduction allowed under s13 sex and other sections is limited to the cost of the building or improvements

Section 13 sept Low Cost Residential Units on loan account Employers will be allowed tax relief under s 13sept for the sale of employer-provided lowcost residential units to employees. S 13 sept will allow the deduction in respect of disposal if: 

 

Page | 91

the disposal is not subject to any conditions except for the termination of employment clause or when there is consistent failure for a period of three months to pay the relevant amount owing in respect of the low-cost housing the disposal is effected by an interest free loan to the employee, and the disposal is for an amount less or equal to the actual cost to the employer

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Low cost housing is defined as: 

a stand-alone unit with a cost not exceeding R200 000 (excluding the land and bulk infrastructure) and the owner does not charge more than 1% monthly rental of the cost an apartment not exceeding R250 000 and the owner does not charge a monthly rental of 1% of the cost

Allowance A deduction of 10% of any amount owing to the taxpayer (employer) by the employee in respect of low cost housing at the end of the year of assessment. Maximum period – 10 years Recoupment If an amount, owed by the employee is paid back to the employer, the deemed recoupment will be the lesser of:  

the amount repaid on the loan, or the amount claimed as a deduction under s13 sept in that or any previous years of assessment

Section 8(4)(a) Recoupment General Provision When an allowance has previously been allowed on a capital asset that had the effect of reducing the asset’s tax value, and the asset is sold for a price in excess of its tax value, the difference between the selling price (up to a maximum of the original cost price) and the tax value is a taxable recoupment. The recoupment is included in the taxpayers’ income unless the special provisions of section 8(4)(e) apply.

Section 20 Assessed Losses Section 20 of the Income Tax Act 58 of 1962 defines an assessed loss as:   

An amount By which the deductions admissible under section 11 Exceeds the income from which they are so admissible

Balance of assessed loss means the excess of any assessed losses incurred in the carrying on of a trade over the taxable income from that trade and any other taxable income.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 11

Capital Gains Tax

Background This chapter deals with capital gains tax payable by individuals and businesses. Sections of the Act are discussed and knowledge relating to the application of computation of taxes which are payable on the disposal of capital assets resulting in a gain or loss for individuals and businesses.

1. Introduction Capital Gains Tax (CGT) is a tax imposed on the capital gains for a year of assessment in respect of an asset disposed of, included in the taxpayer’s taxable income for the year of assessment, which is then the question. The amendment to be included in the taxpayer’s taxable income in terms of Section 26A of the Income Tax Act 58 of 1962 (the Act), linking the Act with the Eighth Schedule. CGT affects those who are resident or ‘partially resident’ in South Africa. The capital gain equals the amount by which the proceeds in consequence of the disposal of the asset exceed the base cost of the asset.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Taxable capital gains are subject to normal tax as the taxable capital gain is added to income in the tax computation. Only a certain percentage of the capital gain – 33,3 % for individuals and 50% for corporate entities- forms the amount referred to as taxable capital gains. 2. Basic Framework of CGT Gross Income (section 1)

XXX

Less: Exempt income (per sections 10 and 10A)

(XX)

Income

XXX

Less: Deductions and set-offs (per sections 11 to 37H)

(XX)

Add: All amounts to be included in taxable income in terms of section 26A Capital gains for the year (8th Schedule)

XXX

Less: Capital losses for the year

(XX) XXX

Less: annual exclusion (natural persons/special trust) Aggregate capital gain Less: Assessed loss from previous year of assessment Net capital gain

(R20 000) XXX (XX) XXX

Taxable capital gain included

XX

Taxable income

XXX

Annual exclusion (on death) (R200 000)

Rates at which net capital gains are included: Individual, special trust, deceased estate, insolvent estate Untaxed policyholder fund of an insurer Any other case (company, close corporation, trust)

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33,3% 0% 50%

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 12

Taxation of Partnerships

Introduction This chapter covers tax payable by partnerships and the individual partners thereof.

1. Legal Status of a Partnership Although a partnership is a legal relationship between two or more persons who carry on a lawful trade, it is not a separate legal persona distinct from the individuals who constitute it.

2. Normal Tax A partnership is not defined as a person for tax purposes and is therefore not a taxable entity. The partnership is NOT liable for normal tax, the individual partners are liable for tax on their portion of the profits from the partnership. A partnership does not qualify as an employer of the partners and a partner is not regarded as a holder of an office. This results in the non-applicability of certain sections of the Act: 

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Salary paid to partner is not subject to employees’ tax

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

The Seventh Schedule fringe benefit rules do not apply

Provisions of s 8(1) – reimbursive allowances- do not apply

S12M - medical scheme contributions paid in respect of a former employee does not apply.

Section 66 (15) provides that the partnership make a joint return for the partners in respect of the entity. Section 77(7) provides that separate assessments be made for each partner. The taxable income of the partnership is determined first and the taxable income is apportioned among the partners in their profit-sharing ratio. The partnership is allowed to deduct expenses that are incurred in the production of income, as any other entity would be allowed to. The profit realized is then apportioned to each partner in their profit-sharing ratio. There is no employer-employee relationship between the partnership and the partners.

3. Turnover Tax A turnover tax in effect replaces income tax; value added tax and capital gains tax and is payable by microbusinesses. A taxpayer may elect to be subject to the turnover tax, if turnover for the year of assessment does not exceed R1 000 000. The following specific rules apply:

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Where any partner is not a natural person, the turnover tax cannot be elected

Where a partner is a partner of more than one partnership, that partner may not elect to be subject to this tax

Where turnover exceeds R1 000 000 for the year of assessment

With effect from the years of assessment commencing on or after 1 March 2011, but before 1 March 2012 the partnership is a registered VAT vendor

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 13

Taxation of Companies and Close Corporations

Introduction This chapter deals with tax payable by companies and close corporations. The relevant sections of the Act are highlighted and the computation of taxes and secondary taxes which are payable by companies and close corporations are discussed.

1. Companies A company is an artificial legal person and for tax purposes is defined in Section 01 of the Income Tax Act 58 of 1962. A company has a separate and distinct identity from its members’ and shareholders’. The term ‘company’ is widely defined to include:

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South African companies

South Africa public entities

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

A co-operative

Foreign companies

A portfolio of a collective investment scheme

South African charities

A close corporation

The flat rate of tax for companies:    

From 1 April 2008 28% A company pays tax from the first Rand of taxable income received and a company is NOT entitled to any rebate, except a foreign tax rebate (section 6quat) A company is a provisional taxpayer and must be represented by a public officer known as the representative taxpayer. A company may be liable for secondary tax on companies (STC) calculated at 10% on the net amount of any dividend or deemed dividend distributed.

Close Corporations Close corporations are taxed at a flat rate of 28%. For tax purposes a close corporation is a private company and is a provisional taxpayer. A member of a close corporation is a ‘shareholder’ as defined in section 1 and any distributions made by the close corporation to its members constitute dividends and are exempt from tax in their hands. Close corporations enjoy the same dividend exemptions as other taxpayers (section 10(1)(k)(i)).

Secondary Tax on Companies (STC) Section 64B provides for the levy and recovery of STC at a rate of 10% of the net amount of a dividend declared by a company that is a resident. The dividend has to be a dividend as defined in section 1. In terms of Section 64C, STC is also imposed on deemed dividends declared by resident companies. Non-resident companies are not liable for STC. Only dividends declared on or after 17 March 1993 are subject to STC. A company is only liable for STC when it declares a dividend.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 14

Value Added Tax (VAT)

Background This chapter deals with value added tax (VAT) and its applications.

1. Introduction VAT is an indirect tax i.e. the person who bears the tax is taxed indirectly through the transaction into which he enters. VAT payable by or refundable to a vendor is the difference between the vendor’s output tax and input tax. The current rate of taxation is 14%.

2. Calculation of VAT Vat Payable (Refundable) Output tax

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xx

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Less: Input tax Tax Payable/(refundable)

(xx) xx

Summary Supply, Deemed supplies and Non-supplies   

Does not include anything done for nothing Always goods and services e.g. Expropriation is a supply by the owner of the property Sections 8, 18 and 22 deem certain events to be supplies

Section 8(2) Person ceasing to be a vendor   

Deemed supply immediately prior to ceasing to be a vendor Output tax payable on all assets Lesser of market value or costs

Section 8(7) Disposals of going concerns  

Deemed to be a supply of goods The supply may be zero-rated in terms of section 11(1)(e)

Section 8(8) Insurance claims  

Indemnity payment in terms of a short-term insurance contract deemed to be made for services rendered by the insured Short term insurance – VATable

Non-Supplies If an input tax deduction is prohibited, the subsequent supply of goods is not subject to VAT

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Section 18 (3) Fringe Benefits Granting of a benefit or advantage deemed to be a supply of goods and services

Section 18(1) and 18(2) Change of use  

Where a vendor changes the use of an asset from business to private, he is deemed to have supplied them at market value and has to account for output tax Where the use of a good or service becomes a smaller portion of its total use, a VAT adjustment has to be made

Section 22 (3) VAT Clawback If a vendor has not paid a debt within 12 months after the date on which it became payable and has claimed input tax, the VAT portion has to be treated as output tax.

3. Types of Supply Two types: (1) Taxable - either standard rated or zero rated (2) Exempt

Exempt supplies       

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Financial services Residential accommodation – retired persons Certain education services supplied by the State Road transport for passengers Rail transport for passengers Trade union subscriptions Supply by an association not for gain of certain donated goods

© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

     

Crèche and after school care facilities Sale or letting of land outside the Republic Sectional title, share block any housing development scheme for the aged Supply by a local authority of boarding and lodging- non-profit purposes Letting of land for erecting residential dwelling Supply of certain boarding and lodging to employees

Zero-Rated Supplies                 

VAT at 0% Vendor making zero-rated supplies can still claim input tax Exported goods Sale of an enterprise or part of an enterprise as a going concern Sale of certain farming purpose goods Basic foodstuff Sale of goods to a vendor in a custom-controlled area Certain goods paid out for international donor funds Petrol and diesel Gold coins issued by the Reserve Bank Certain ‘old’ mining and prospecting rights Passengers to and from an export country Certain services rendered to non-residents who are out of the country at the time the service was rendered Arranging international transport Services rendered outside the Republic Welfare organization Foreign-going ships or aircraft

Prohibited Inputs    

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Entertainment expenses with some exceptions Motor cars Fees and subscriptions Certain goods and services acquired by a medical aid scheme

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Chapter 15

Administrative Procedures

Topic List Syllabus Reference Introduction This chapter deals with administrative processes relating to taxation referenced to the particular sections of the Act.

1. Overview Chapter III of the Income Tax Act contains the general provisions of the Act:

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PART I

Returns:

Sections 65 to 76A

PART 1A

Advance tax rulings:

Sections 76B to 76S

PART II

Assessments:

Sections 77 to 80

PART III

Objections and Appeals:

Sections 81 to 88

PART IV

Payment and Recovery of tax: Sections 89 to 94

PART V

Representative Taxpayers:

PART VI

Miscellaneous:

Sections 95 to 101

Š 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

Section 102 and 102A

Refunds

Section 103

General anti-avoidance provision

Section 104

Offences and penalties

Section 105

Jurisdiction of courts

Section 105A

Reporting of unprofessional conduct

Section 106

Authentication and service of documents

Section 107

Regulations which may be prescribed

Section 107A

Rules of tax court

Section 108

Power to enter into double tax agreements

Section 109 – 112

Sundry other minor provisions

TAX TABLES AND RATES 1. NORMAL TAX PAYABLE BY NATURAL PERSONS AND SPECIAL TRUSTS Taxable Income Not exceeding R150 000 Exceeding R150 000 but not exceeding R235 000 Exceeding R235 000 but not exceeding R325 000 Exceeding R325 000 but not exceeding R455 000 Exceeding R455 000 but not exceeding R580 000 Exceeding R580 000

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Rate of Tax 18 per cent of taxable income R27 000 plus 25 per cent of the amount by which the taxable income exceeds R150 000 R48 250 plus 30 per cent of the amount by which the taxable income exceeds R235 000 R75 250 plus 35 per cent of the amount by which the taxable income exceeds R325 000 R120 750 plus 38 per cent of the amount by which the taxable income exceeds R455 000 R168 250 plus 40 per cent of the amount by which the taxable income exceeds R580 000

© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

2. TAX THRESHOLDS for the year of assessment ended 29 February 2012 Persons under 65 years of age Persons of 65 and older, but not yet 75 Persons of 75 and older

R59 750 R93 150 R104 261

3. RATES OF TAX FOR SMALL BUSINESS CORPORATIONS Taxable Income Not exceeding R59 750 Exceeding R59 750 but not exceeding R300 000 Exceeding R300 000

4. TRAVEL ALLOWANCE Where the value of the vehicle maintenance Does not exceed R60 000 Exceeds R60 000 but does not exceed R120 000 Exceeds R120 000 but does not exceed R180 000 Exceeds R180 000 but does not exceed R240 000 Exceeds R240 000 but does not exceed R300 000 Exceeds R300 000 but does not exceed R360 000 Exceeds R360 000 but does not exceed R420 000 Exceeds R420 000 but does not exceed R480 000 Exceeds R480 000

Rate of Tax 0 per cent of taxable income 10 per cent of amount by which taxable income exceeds R59 750 R24 025 plus 28 per cent of the amount by which taxable income exceeds R300 000

Fixed cost

Fuel cost

R19 492 R38 726

64,6 cents 68 cents

cost 26,4 cents 29,2 cents

R52 594

71,3 cents

31,9 cents

R66 440

77,7 cents

35,0 cents

R79 185

87,0 cents

44,7 cents

R91 873

93,9 cents

54,2 cents

R105 809

100,9 cents

65,8 cents

R119 683

113,1 cents

67,6 cents

R119 683

113,1 cents

67,6 cents

Where the distance travelled does not exceed 8 000 kilometres the rate per kilometre will be

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305 cents

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ExPress Notes ACCA F6 (ZAF) Taxation – South Africa

5. EMPLOYER OWNED VEHICLES  Vehicle not subject to a maintenance plan - 3,5% of the determined value  Vehicle subject to a maintenance plan – 3,25% of the determined value

6. PERSONAL TAX REBATES Description Reference to the Income Tax Act 58 of 1962 Primary rebate Secondary rebate Tertiary rebate

Section 6(2)(a) – any age Section 6(2)(b) – 65 years and older Section 6(2)(c ) – 75 years and older

Amount R10 755 R6 012 R2 000

(end of ExPress Notes)

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ACCA F6 ZAF Taxation - South Africa