SOUTH AFRICAN REVENUE SERVICE

TAXATION IN SOUTH AFRICA 2008/09

Another helpful guide brought to you by the South African Revenue Service

TAXATION IN SOUTH AFRICA 2008/09

Foreword This guide is a general guide dealing with taxation in South Africa. It is not meant to delve into the precise technical and legal detail that is often associated with taxation. It should, therefore, not be used as a legal reference. Advance tax rulings referred to in PART IA of CHAPTER III of the Income Tax Act, No. 58 of 1962 is not dealt with in this guide. The information in this guide relates to a) b) c) individuals for the 2008/09 year of assessment ending on 28 February 2009; trusts for the 2008/09 year of assessment ending on 28 February 2009; and companies with years of assessment ending during the twelve month period ending on 31 March 2009. The Commissioner for the South African Revenue Service is responsible for the administration of taxation and customs legislation. Should you require additional information concerning any aspect of taxation, you may contact your local SARS office; contact the SARS National Call Centre if calling locally, on 0860121218; or if calling from abroad, +27 11 602 2093;

visit the SARS website at www.sars.gov.za; or contact your own tax advisors/practitioners.

Prepared by Legal and Policy Division SOUTH AFRICAN REVENUE SERVICE February 2009

CONTENT 1 1.1 1.2 1.3 1.4 2 2.1 2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 2.1.6 2.1.7 2.1.8 2.1.9 2.2 INTRODUCTION Autonomous Body SARS Act Collection of taxes Overview of Taxes INCOME TAX Introduction Main source of Governments income Registration as a taxpayer Change of address Year of assessment Filling of tax returns eFiling Payments at Banks Assessment Calculation of taxable income A resident of SA 8 8 8 8 9 12 12 12 12 12 12 12 13 13 13 13 14 15 15 16 17 18 19 19 19 21 22 22 22 23 28 30 32 38 38 45 3

2.1.10 Calculation of final income tax liability 2.2.1 Individuals 2.2.2 Companies and other entities 2.2.3 South African residents working outside SA 2.2.4 Agreements for the avoidance of double taxation (DTA) 2.2.5 Unilateral relief for foreign taxes paid 2.3 2.3.1 2.3.2 2.4 2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 2.4.6 2.4.7 2.4.8 2.4.9 Not a resident of SA A person who is not a resident of SA, who is temporarily working in SA Employees working at foreign diplomatic or consular missions in SA Individuals Taxation of income from employment Standard Income Tax on Employees (SITE) Pay-As-You-Earn (PAYE) Provisional tax Income of spouses Allowable deductions Prohibited deductions The taxation of taxable benefits Pensions

2.4.10 Annuities 2.4.11 Withholding tax on foreign entertainers and sportspersons 2.4.12 Withholding tax on payments to non-residents on the sale of their immovable property in SA 2.5 2.6 2.7 2.8 2.9 Rental income Investment income Tax on royalties Restraint of trade Business income Tax consequences of doing business in a company Provisional tax Controlled foreign companies Small Business Corporations (SBCs) Special allowances Secondary Tax on Companies (STC) Insurance companies Mining companies Shipping and aircraft

46 47 47 48 48 50 50 51 51 51 51 52 55 57 72 73 74 75 75 77 77 79 79 79 79 80 80 80 81 83 84 84 84 86 4

2.10 Companies and businesses 2.10.1 2.10.2 2.10.3 2.10.4 2.10.5 2.10.6 2.10.7 2.10.8 2.10.9

2.10.10 Farming 2.10.11 Deductions in respect of expenditure and losses incurred prior to commencement of trade (pre-trade costs) 2.11 Donations tax (and PBOs) 2.12 Capital Gains Tax (CGT) 2.12.1 2.12.2 2.12.3 2.12.4 2.12.5 2.12.6 2.12.7 2.12.8 2.12.9 Introduction Registration Rates Capital losses Disposal Exclusions Base cost Annual exclusion Small businesses resident of SA 2.12.11 CGT on disposal of foreign assets by residents 2.13 Ring-fencing of assessed losses

2.12.10 CGT on disposal of property in SA by a person who is not a

2.14 Dispute Resolution 2.14.1 2.14.2 2.14.3 2.14.4 Objections Appeals Rules regarding objections and appeals Alternative Dispute Resolution (ADR)

87 87 87 87 88 89 89 95 95 95 95 97 97 97 98 98 98 100 100 100 104 104 106 107 107 107 107 108 108 108 109 109 110 5

2.15 Secrecy and confidentiality 2.16 Tax rates applicable to any natural person, deceased estate, insolvent estate, special trust, trusts and company 3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.8.1 3.8.2 3.8.3 3.8.4 4 4.1 4.2 4.3 4.3.1 4.3.2 4.3.3 4.3.4 4.4 4.4.1 4.4.2 4.4.3 4.4.4 VALUE-ADDED TAX (VAT) Introduction Rates Who is liable for the payment of VAT? Presumptive tax an alternative to VAT registration Items subject to the standard rate Items subject to the zero-rating Exemptions Tourists, diplomats and exports to foreign countries Tourists Diplomats Exports to foreign countries Small Retailers VAT Package CUSTOMS Introduction The Southern African Customs Union (SACU) Free trade agreements and preferential arrangements with other countries Bi-lateral Agreements (Non-reciprocal) Preferential dispensation for goods entering SA (Non-reciprocal) Free or Preferential Trade Agreements (FTAs or PTAs) (Reciprocal) Generalised System of Preferences (GSPs) (Non-reciprocal) Duties Customs duty Specific excise duties and specific customs duties on imported goods of the same class or kind Ad valorem excise duties and ad valorem customs duties on imported goods of the same class or kind Anti-dumping and countervailing duties on imported goods

4.5 4.6 4.7 4.8 4.9

VAT Importation of goods Customs value Customs declarations Goods imported for inward or outward processing General rebates of customs duties

110 111 111 112 112 112 113 115 116 117 117 117 117 118 118 118 119 120 121 121 122 122 124 124 124 125 126 126 128

4.10 Persons entering SA 4.10.1 Goods imported without payment of customs duty and which are exempt from VAT 4.10.2 Customs clearance procedures for travellers 4.11 Implementation of a Single Administrative Document (SAD) 4.12 Goods accepted at appointed places of entry 4.13 Cargo entering SA 4.14 State warehouses 4.15 Importation of household effects by immigrants/returning residents 4.16 Motor vehicles 4.17 Motor vehicles imported on a temporary basis 5 5.1 5.2 5.3 5.4 6 7 8 9 10 11 12 13 EXCISE DUTIES AND LEVIES Specific Excise duties Ad valorem Excise duties General Fuel Levy and Road Accident Fund Levy Environmental Levy TRANSFER DUTY ESTATE DUTY STAMP DUTY UNCERTIFICATED SECURITIES TAX (UST) SKILLS DEVELOPMENT LEVIES (SDL) UNEMPLOYMENT INSURANCE CONTRIBUTIONS AIR PASSENGER DEPARTURE TAX SOUTH AFRICAN RESERVE BANK EXCHANGE CONTROL REGULATIONS Annexure A: EXAMPLES OF HOW INCOME TAX IS CALCULATED

GLOSSARY ADR CGT BLNS : : : Alternative Dispute Resolution Capital Gains Tax Botswana, Lesotho, Namibia and Swaziland Commissioner for the South African Revenue Service 6

Commissioner :

DTA FOB GATT IT Act PAYE SA SACU SADC SARS SBCs SDL SITE SMMEs STC TCC UST VAT Act VAT

: : : : : : : : : : : : : : : : : :

An agreement for the avoidance of double taxation between the government of SA and the government of a foreign country Free on Board General Agreement on Tariffs and Trade Income Tax Act, No. 58 of 1962 Pay-As-You-Earn (Employees Tax) Republic of South Africa South African Customs Union Southern African Development Community South African Revenue Service Small Business Corporations Skills Development Levy Standard Income Tax on Employees Small, Medium and Micro Enterprises Secondary Tax on Companies Tax Clearance Certificate Uncertificated Securities Tax Value-Added Tax Act, No. 89 of 1991 Value-Added Tax

INTRODUCTION

1.1

Autonomous Body SARS was established with effect from 1 October 1997 by the South African Revenue Service Act, No. 34 of 1997 (the SARS Act) as an autonomous administrative organ of state within the public administration, but as an institution outside the public service.

1.2

SARS Act The SARS Act gives SARS the mandate to y y y collect all revenues that are due; ensure maximum compliance with relevant legislation; and provide a customs service that will maximise revenue, facilitate trade and protect ports of entry against smuggling and other illegal trade.

1.3

Collection of taxes y y y SARS employs approximately 15 000 employees Tax revenue to be collected for 2008/09 is R627,7 billion The number of registered taxpayers in 2007/08 was as follows: o o o o o Companies Individuals Trusts Vendors (value-added tax) Employers (employees tax) 2,18 million 5,3 million 394 389 745 487 379 675

The tax revenue contribution for 2007/08 was made up as follows: y Income Tax o o y y y y y y Personal Income Tax Corporate Income Tax : 29,4% : 24,5% : 3,6% : 4,1% : 26,3% : 4,7% : 3,2% : 4,2%

Secondary Tax on Companies Fuel Levy Value-Added Tax Customs Duties Excise Duties Other

1.4

Overview of Taxes Various taxes are levied by the National Government in terms of the IT Act. Such taxes are: y y y y y Income tax. Withholding tax on foreign entertainers and sportspersons. Withholding tax on payments to non-residents on the sale of their immovable property in SA. Donations tax. Secondary tax on companies.

Provincial and municipalities do not levy such taxes. As from 2001, South Africa moved from a source-based income tax system to a residence-based income tax system. Residents are (subject to certain exclusions) taxed on their worldwide taxable income, irrespective of where the income is earned. Foreign taxes proved to be payable are credited against South African tax payable on foreign income. Foreign income and taxes are translated into the South African currency, the Rand. Capital gains tax (CGT) was implemented on 1 October 2001, which forms part of the income tax system. The taxable capital gain made upon the disposal of assets is included in the taxable income of the taxpayer. (For more information see 2.12.) The South African Government has entered into agreements for the avoidance of double taxation with various countries. This means that the same income will not be taxed twice, or, if it is, then a credit will normally be allowed in the country of residence in respect of the foreign tax paid. Value-added tax (VAT) is levied by the National Government in terms of the VAT Act. VAT which is based on destination consumption, is levied at a standard rate of 14% on the supply by any vendor of all goods or services supplied by him; the importation of any goods into South Africa by any person; and the supply of imported services by any person,

subject to certain exemptions, exceptions, deductions and adjustments provided for in the VAT Act. (For more information see 3 to 4.5.)

Ordinary customs duty, specific excise duties and specific customs duties, ad valorem excise duties and ad valorem customs duties, environmental levy, fuel levy, ordinary levy, anti dumping duty and countervailing duty are levied in terms of the Customs and Excise Act, No. 91 of 1964. Ordinary customs duties are levied on imported goods. Customs provides the interface between the domestic and broader global economy, and has a key role to play in facilitating legal trade and in protecting the economy and society by clamping down on illegal and unfair trade practices. Specific excise duties and specific customs duties are consumption duties that are levied on a selective number of locally manufactured goods and imported goods of the same class or kind and are fiscal in nature. Ad valorem excise duties and ad valorem customs duties levied on imported goods of the same class or kind. An environmental levy is collected on certain specific products and used for the clean up and protection of the environment. Fuel levy is levied on distillate fuels, mixtures of illuminating or heating kerosene with lubricity agents, biodiesel and petrol which have been manufactured in or imported in SA. Ordinary levy is the equivalent of ordinary customs duty paid by governmental bodies in Botswana, Lesotho, Namibia and Swaziland (BLNS)_for specific purposes. Anti-dumping and countervailing duty is an additional duty levied on goods imported from a supplier or originating in a country so specified and which is dumped in SA. Transfer duty, estate duty, stamp duty and uncertificated securities tax (which has been replaced with a Securities Transfer Tax effective from 1 July 2008) 10

skills development levy, unemployment insurance contributions, are also levied by the National Government. (For more information see 6 to 11.) SARS also administers the collection of the Skills Development Levy (SDL), which became payable with effect from 1 April 2000. SDL is levied on payrolls in order to finance the development of skills and thus enhance productivity. The SDL is payable by employers at a rate of 1% of the payroll. Employers providing training to employees receive grants from Sector Training and Education Authorities (SETAs) in terms of this initiative. SARS administers the collection of the bulk of unemployment insurance contributions, which was implemented on 1 April 2002. Unemployment insurance contributions are collected from employers on a monthly basis. The total amount of the contributions collected monthly from the employer, which is equal to 2% of the remuneration paid or payable by the employer to the employee, consists of a contribution made by an employee equal to 1% of the remuneration paid or payable by the employer to the employee during any month; and a contribution made by an employer equal to 1% of the remuneration paid or payable by the employer to that employee during any month. Section 1 of the Unemployment Insurance Contributions Act, No. 4 of 2002 defines remuneration as remuneration defined in paragraph 1 of the Fourth Schedule to the IT Act. The employer must pay the total contribution of 2% (1% contributed by the employee and 1% contributed by the employer) over to SARS within seven days after the end of the month during which the amount was deducted from the remuneration of the employee. Unemployment insurance contributions do not apply to so much of the remuneration paid or payable by an employer to an employee, as exceeds R12 478 per month (R149 736 annually); or R2 879,53 per week.

Municipalities levy rates on the value of fixed property to finance the cost of municipal services. 11

2 2.1

INCOME TAX Introduction Income tax is the Governments main source of income and is levied in terms of the IT Act.

2.1.1 Main source of Governments income

2.1.2 Registration as a taxpayer Every person who becomes liable for any income tax or who becomes liable to submit any return of income must register as a taxpayer at SARS within 60 days after so becoming a taxpayer by completing an IT 77 form.

2.1.3 Change of address The IT Act requires that if a persons address which is normally used by the Commissioner for any correspondence with that person changes, that person must, within 60 days after that change, notify SARS of the new address for correspondence.

2.1.4 Year of assessment The year of assessment for individuals and trusts covers a period of 12 months and commences on 1 March of a specific year and ends on the last day of February the following year. Individuals and trusts may be allowed to draw up their financial statements for their businesses to dates other than the end of February. Companies are permitted to have a year of assessment ending on a date that coincides with their financial year. If the financial year-end is 30 June, its year of assessment will run from 1 July of a specific year to 30 June the following year.

2.1.5 Filing of tax returns The income tax returns must be submitted manually or electronically by a specific date each year. This date is published for information of the general public and is promoted by way of a filing campaign to encourage compliance in this regard.

12

2.1.6 eFiling The primary objective of eFiling is to facilitate the electronic submission of tax returns and payments by taxpayers and tax practitioners. Taxpayers registered for e-Filing can engage with SARS online for submission of returns and payments in respect of the following taxes: Value-added tax (VAT). Income tax. Skills Development Levy (SDL). Unemployment Insurance Fund (UIF). Secondary tax on companies (STC). Transfer duty and stamp duty. Pay-as-you-earn (PAYE). Provisional tax.

For more information visit the SARS eFiling website at www.sarsefiling.gov.za.

2.1.7 Payments at Banks Payment of taxes can be made via First National Bank, ABSA, Nedbank and Standard Bank internet facilities. Over the counter payment of taxes can also be done at these banks. If more details are required, visit the SARS website.

2.1.8 Assessment From the information furnished in the income tax return, SARS raises an assessment showing the income tax due by you or due to you (refundable), as the case may be, for that year of assessment.

2.1.9 Calculation of taxable income The IT Act provides for a series of steps to be followed in arriving at the taxpayers taxable income (as defined in the IT Act) for a specific year or period of assessment.

The first step Determine the taxpayers gross income for a specific year or period of assessment, namely, in the case of any person who is a resident, the total amount of income (worldwide), in cash or otherwise, received by or accrued to or in favour of that person; or 13

any person who is not a resident, the total amount of income, in cash or otherwise, received by or accrued to or in favour of that person from a source within or deemed to be within SA, during such year or period of assessment.

Receipts or accruals of a capital nature (except those referred to in paragraphs (a) to (n) of the definition of gross income in section 1 of the IT Act) are generally excluded from gross income. The Eighth Schedule to the IT Act deals with capital gains and capital losses.

The second step Calculate the income, of the taxpayer by deducting all amounts that are exempt from income tax in terms of the IT Act from the taxpayers gross income.

The third step In arriving at taxable income deduct all the amounts allowed to be deducted or set-off in terms of the IT Act from income; and add all amounts (which includes taxable capital gains) to be included or deemed to be included in the taxable income in terms of the IT Act.

2.1.10 Calculation of final income tax liability The IT Act provides for a series of steps to be followed in arriving at the taxpayers final income tax liability.

The first step Determine the normal (income) tax by multiplying the taxable income with the applicable rate of income tax.

The second step Determine net normal tax by deducting from normal tax the normal tax rebate/(s) (only applicable in the case of a natural person).

The third step In arriving at the final income tax liability the taxpayer must 14

a)

deduct sum of all tax credits, that is, SITE, PAYE and provisional tax payments made by the taxpayer in respect of that specific year of assessment, from net normal tax; and

b)

add any balance of account as at the date of assessment to net normal tax.

2.2

A resident of SA Two tests (namely the ordinarily resident test and the physical presence test) apply in order to determine whether or not an individual is a resident of SA.

2.2.1 Individuals

Ordinarily resident test This test is to determine whether the individual is ordinarily resident in SA. The courts have interpreted the term ordinarily resident to mean the country to which an individual would naturally return from his/her wanderings. It might, therefore, be called an individuals usual or principal residence and it would be described more aptly, in comparison to other countries, as the individuals real home.

Physical presence test This test applies to an individual who is not considered ordinarily resident in SA. In terms of this test, an individual, who is physically present in SA for a period(s) exceeding 91 days in aggregate during the year of assessment under consideration; 91 days in aggregate during each of the five years preceding the year of assessment under consideration; and 915 days in aggregate during the above preceding five years of assessment, will be regarded as resident in SA from the beginning of the sixth year of assessment. A day includes a part of a day, but does not include any day that a person is in transit through SA between two places outside SA where the person does not formally enter SA 15

through a port of entry as defined in section 9(1) of the Immigration Act, 2002 (Act No. 13 of 2002); or at any other place as may be permitted by the Director General of the Department of Home Affairs upon application or the Minister of Home Affairs granted an exemption in terms of the Immigration Act, 2002.

Where an individual who is resident as a result of the physical presence test is absent from SA for a continuous period of at least 330 full days immediately after the day on which he/she ceased to be physically present in SA, he/she will be regarded as being non-resident from the date on which he/she ceased to be physically present in SA. Note: Any person who is deemed to be exclusively a resident of another country with which SA has entered into an agreement for the avoidance of double taxation is excluded from the definition of resident. For more information see Interpretation Notes No. 3 4 February 2002 and No. 4 (Issue 3) 8 February 2006 available on the SARS website.

2.2.2 Companies and other entities Any company or other entity which is incorporated, established, formed in SA, or which has its place of effective management in SA is regarded as being resident in SA. The term place of effective management refers to the place where the company is managed on a regular or day-to-day basis by the executive directors or senior managers of the company, irrespective of where the overriding or central management and control is exercised, or where the board of directors meet. It is the place of execution and implementation of the companys policy and strategic decisions. The place of effective management test focuses on the companys purpose and operational management and not on the shareholder functions or the place where the day-to-day business activities are conducted. It is important to note that the place from where the entity is managed and controlled, that is, the place where strategic decision-making and control takes 16

place, need not necessarily be the same as the place from where it is effectively managed, although in practice they often coincide. For more information see Interpretation Notes No. 6 26 March 2002 available on the SARS website.

2.2.3 South African residents working outside SA As a result of SAs residence basis of taxation, SA residents who derive income from countries other than SA are taxed in SA unless an agreement for the avoidance of double taxation with another country stipulates that only the other country has a right to tax the income; or the income is specifically exempt from income tax in SA.

With regard to any form of remuneration (salary, commission, leave pay, bonus, taxable benefits, broad-based employee share plans, share options, etc) received by or accrued to an employee during a year of assessment in respect of services rendered outside SA for or on behalf of an employer, that remuneration will be exempt from income tax in SA, if that employee was outside SA o for a period or periods exceeding 183 full days in aggregate during any period of 12 months; and o for a continuous period exceeding 60 full days during that period of 12 months; and o those services were rendered during that period or periods.

Notes: (1) The remuneration, referred to above, which is received by or accrued to an employee during a year of assessment in respect of services rendered by that employee in more than one year of assessment, will be taxed evenly over the period those services were rendered. (2) For the purposes of counting these days, a person will still be regarded as being outside SA where the person is in transit through SA between two places outside SA and he/she does not formally enter SA through a port of entry, or at any other place as may be permitted by the Director General of the Department of Home Affairs or the Minister of Home Affairs.

17

(3) This exemption from income tax will not be applicable to residents who are employed in the national or provincial spheres of government, any local authority or any public entity if 80 per cent or more of the expenses of these entities are defrayed from funds voted by Parliament. However, a person who is not a resident who is employed by such entities to render services outside SA will be exempt from South African income tax on the remuneration for the services rendered if the remuneration is taxed in his/her country of residence and the foreign tax is not paid on his/her behalf by the employing entities. (See Interpretation Note No. 16 27 March 2003 available on the SARS website.) (4) The remuneration of an officer or crew member of a ship is also exempt from income tax if the requirements of section 10(1)(o) of the IT Act are met (for more information see Interpretation Note No. 34 12 January 2006 available on the SARS website). (5) This exemption does not apply to any other income such as interest or rentals that the resident may earn during these periods.

2.2.4 Agreements for the avoidance of double taxation (DTA) It is practice in most countries for income tax to be imposed both on the worldwide income derived by the residents of the country and on income derived by persons who are not residents of that country which arises in that country. The effect of such a system is that income derived by a resident of one country from a source in another country is subject to tax in both countries. As this position clearly discourages foreign investment, countries that have trade relationships enter into agreements for the avoidance of double taxation. These agreements commonly provide that income of a particular nature will be taxed in only one of the countries, or may be taxed in both countries with the country of residence allowing a credit for the tax imposed by the other country, or exempting that income from income tax. SA uses the credit method. Comprehensive agreements for the avoidance of double taxation on the same income are in force between the government of SA and various foreign governments. These agreements, agreements that are in the process of being finalised, limited sea and air transport agreements, etc are available on the SARS website, under Legal and Policy. 18

2.2.5 Unilateral relief for foreign taxes paid Where there is no double taxation agreement between the relevant countries, the domestic tax legislation of each country will apply independently of each other. A resident who is taxable in SA on income received from a foreign country and who is liable for tax in the foreign country on that income will be allowed a credit for the foreign tax paid against the South African tax liability. To qualify for this credit the taxes must have been payable to the government of any country other than SA, without any right of recovery of the tax payable. It will be necessary for a resident to submit proof of foreign taxes paid or payable. An assessment or the equivalent thereof, tax receipts or an official document will generally be accepted as proof of foreign tax paid or payable. This rebate may be granted in substitution for the relief to which a resident would be entitled under a double taxation agreement and is not granted in addition to such relief.

2.3

Not a resident of SA It is internationally accepted that the income from employment should be subject to income tax in the source country, that is, where the services are actually rendered, as opposed to the country where the employee is resident. A person who is not a resident of SA who is working in SA for short periods are liable for income tax in SA in respect of his/her South African source income. The normal employees tax rules apply to remuneration received by or accrued to that person. Where the employer or representative employer is present in SA, the income from employment will be subject to income tax by way of employees tax (SITE and PAYE) which is deducted. The income tax position of a person who is not a resident of SA may be affected by a DTA entered into between the government of SA and the government of the foreign country in which that person resides. In terms of that agreement that persons remuneration earned in SA may be exempt from income tax in SA where specific requirements are met. In the absence of a DTA, that income will be taxable in SA. 19

2.3.1 A person who is not a resident of SA, who is temporarily working in SA

Where such an agreement has been concluded with a foreign country, the employment income of that person will generally be subject to income tax in SA. However, if all three of the following requirements are met the income will be exempt from income tax in SA that person is present in SA for a period or periods in aggregate not exceeding 183 full days in any 12 month period (not necessarily a year of assessment); and the remuneration is paid by, or on behalf of, an employer who is not a resident of SA; and the remuneration is not borne by a permanent establishment that the employer has in SA. A permanent establishment means in essence a fixed place of business through which the business of the employer is wholly or partly conducted. Any taxable benefit (see 2.4.8) enjoyed by a seconded employee who is not a resident of SA will be subject to income tax in SA on the same basis as any resident employee. Taxable benefits subject to income tax include the following: Cost of home leave Childrens education expenses Security costs Storage of furniture

Where an employee who is not a resident of SA renders services in SA has been provided with residential accommodation in SA, the taxable benefit will be taxable in his/her hands for the duration of his/her employment in SA. However, there is an exclusion to this rule contained in paragraph 9(7A) of the Seventh Schedule to the IT Act. In terms of paragraph 9(7A) no value must be placed on the accommodation provided by the employer to that employee, where the accommodation is not granted for a period exceeding 2 years as from the date of arrival of the employee in SA or the accommodation is provided to that employee during the year of assessment and that employee is physical present in SA for a period less than 90 days in that year. Any taxable benefit received by an employee, who is not a resident of SA, by virtue of the fact that his/her employer has borne some expenditure incurred in consequence of the employees transfer from one place of employment to 20

another, or on termination of that employees employment is usually not subject to income tax in SA. No income tax liability will arise in respect of amounts paid to employees, who are not residents of SA, for reimbursement by a foreign employer for the loss on sale of vehicles and residences outside of SA as the amounts are not from a source or deemed to be from a source in SA, unless the employee is regarded as a resident of SA. More information on taxable benefits received or accrued is available on the SARS website under PAYE Guidelines. A number of immigrants have, in the past intimated that they were advised that they did not have to pay income tax during the first year in SA. SARS would like to make it clear to all concerned that the IT Act does not make provision for any such general exemption. Note: Individuals who are not ordinarily resident in SA should bear in mind the physical presence test (see 2.2.1).

2.3.2 Employees working at foreign diplomatic or consular missions in SA The remuneration of an employee of a foreign diplomatic or consular mission in SA is exempt from income tax in SA if the employee is stationed in SA for the sole purpose of holding office in SA as an official of a foreign government; and the employee is not ordinarily resident in SA.

Employees in the domestic service of the above employees are also exempt from income tax provided they are not SA citizens and are not ordinarily resident in SA. The fact that the employee or the employee in his/her domestic service will as a consequence of the application of the physical presence test (see 2.2.1) become a resident of SA will not affect his/her remuneration exemption in this regard. Where the above employees (who qualify for exemption) apply for and receive permits for permanent residence in SA, any exemption falls away. Liability for income tax arises from the date of issue of the permit for permanent residence. Furthermore, where a foreign government carries on business activities in SA, 21

the remuneration payable to its employees could also be taxable in SA. (The taxability of this income may be affected by a DTA.) South African residents who are employed by foreign diplomatic or consular missions (that is, locally recruited staff) are not exempt from income tax on their income received from that mission. Where the employees are not exempt from income tax in SA in the above circumstances, they must register as provisional taxpayers with their local SARS offices. Note: The salaries of foreign employees of foreign states, foreign government agencies and certain multinational organisations, are also exempt from income tax in SA.

2.4

Individuals Income from employment can be divided into three broad categories cash remuneration such as a salary, overtime, commission or a bonus; cash allowances such as a travelling or subsistence allowance; and non-cash taxable benefits such as the use of a motor vehicle owned by the employer or the occupation of a dwelling owned by or paid for by the employer.

2.4.1 Taxation of income from employment

2.4.2 Standard Income Tax on Employees (SITE) The SITE system generally applies to individuals whose net remuneration does not exceed R60 000 annually; and who are not in receipt of a travelling allowance.

The SITE deducted from the employees remuneration in this case is generally regarded as final and those individuals do not have to submit income tax returns, except if taxable investment income or other sources of income is earned or tax deductible expenditure is claimed. However, in the event of SARS issuing you with an income tax return, even though it is not required in terms of your income, the income tax return must always be completed and be submitted back to SARS. The income tax return must not simply be ignored. 22

SITE is applicable to net remuneration or the annual equivalent of net remuneration as does not exceed R60 000; or any annual payment included in net remuneration to the extent that the sum of all such annual payments and the annual equivalent of all other net remuneration as does not exceed R60 000. SITE is usually deducted as the final liability for income tax. The employee may, however, apply to SARS for the income tax liability to be recalculated where he/she is entitled to a deduction in respect of medical expenses exceeding 7,5% of his/her taxable income; contributions made to a registered medical scheme which do not exceed the capped amounts (R570 for yourself, R1 140 for yourself and one dependant or R1 140 for yourself and one dependant plus R345 for every additional dependant thereafter) less any contributions made by the employer which were not included in the employees remuneration as a taxable benefit; medical expenses paid in the case of a handicapped person; contributions made to a registered medical scheme if the employee is 65 years of age or older; medical expenses borne by an employee who is 65 years of age or older; any premium paid in terms of an insurance policy to the extent that y y it covers the employee against the loss of income as a result of illness, injury, disability or unemployment; and the amounts payable in terms of the above-mentioned policy constitute or will constitute income as defined in section 1 of the IT Act or; retirement annuity fund contributions which were not taken into account.

2.4.3 Pay-As-You-Earn (PAYE) The purpose of PAYE is to ensure that the employees income tax liability is settled at the same time that the income is earned. The advantage of this system is that the income tax liability for the year is settled over the course of the whole year of assessment. Employers are obliged to deduct employees tax (SITE and/or PAYE) from remuneration every month. The employees tax deducted must be paid over to 23

SARS within seven days after the end of the month in respect of which the deductions were made. These deductions are determined according to tax deduction tables. Employees whose net annual remuneration exceeds R60 000 (for employees under 65 years of age) or R74 000 (for employees who are 65 years of age or older) are required to submit income tax returns. Employees tax deductions for those employees are split into SITE and PAYE deductions at the end of a year of assessment. Employees who also earn income from other sources, for example, rental, taxable interest/dividends, trade, taxable capital gain or capital loss exceeding R16 000, allowances (excluding an amount reimbursed) must submit an income tax return irrespective of whether the net annual remuneration exceeds the above-mentioned amounts or not. Employees tax certificates (IRP 5s) are issued to employees from whom employees tax has been deducted. These certificates reflect a breakdown of remuneration received, deductions made from the remuneration and the employees tax (SITE and PAYE) deducted. In cases where the employer has, for valid reasons, not deducted employees tax, the employer must provide the employee with an IT 3(a) certificate. Information such as taxable benefits and remuneration must be reflected on the IT 3(a). PAYE operates as follows in respect of the more complex cases of: (a) Directors The remuneration of directors of private companies (including individuals in close corporations performing similar functions) is subject to employees tax. The remuneration of private company directors is often only finally determined late in the year of assessment or in the following year. The directors in these circumstances finance their living expenditure out of their loan accounts until the remuneration is determined. To overcome the problem of no monthly remuneration being payable from which employees tax can be withheld, a formula is used to determine the directors deemed monthly remuneration upon which the company must pay employees tax 24

on behalf of the director. More information on the application of the formula and relief from hardship is available in Interpretation Note No. 5 (issue 2) 23 January 2006 on the SARS website. A director is not entitled to receive an employees tax certificate (IRP 5) in respect of the amount of employees tax paid by the company on the deemed remuneration if the company has not recovered the employees tax from the director.

(b) Personal Service Companies and Personal Service Trusts A personal service company or personal service trust is any company or trust (other than a labour broker) where services are rendered on behalf of that company or trust to a client of that company or trust personally by any person who is a connected person1 in relation that that company or trust, and that connected person would be regarded as an employee of that client if that service was rendered by that connected person directly to the client; or where those duties must be performed mainly at the clients premises and that connected person or that company or trust is subject to the control or supervision of that client as to the manner in which the duties are performed in rendering that service; or more than 80% on the income of that company or trust consists of amounts directly or indirectly received from one client. However, where company or trust referred to above employs three or more full-time employees throughout the year of assessment who are on a full1

A connected person generally means in relation to a natural person- a relative of a natural person and any trust of which a natural person is a beneficiary; a trust- a beneficiary of a trust and any relative in relation to such beneficiary; a company- any other company which would be part of a group of companies if a more than 50% holding of equity shares were applied and any person, other than a company, who individually or jointly with any other connected person in relation to him/herself holds directly or indirectly at least 20% of the companys equity share capital or voting rights. For a complete definition of a connected person, see section 1 of the IT Act.

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time basis engaged in the business of the company or trust of rendering that service (other than any employee who is a connected person), it will not be classified as a personal service company or personal service trust. Payments made to personal service companies and personal service trusts are subject to the deduction of employees tax.

(c) Labour Brokers A labour broker is any person who carries on the business, for reward, of providing clients of such person with other persons to render a service to such clients for which such other persons are remunerated. Employers are required to deduct employees tax from all payments made to a labour broker, unless the labour broker is in possession of a valid exemption certificate issued by SARS. An exemption certificate will be issued by SARS under the following circumstances

the person carries on an independent trade and is registered as a provisional taxpayer; the labour broker is registered as an employer; and all returns required by SARS, have been submitted.

SARS will not issue an exemption certificate if more than 80% of the gross income of the labour broker during the year of assessment consists of amounts received from any one client of the labour broker, unless the labour broker who throughout the year of assessment employs three or more full-time employees who are on a full-time basis engaged in the business of the labour broker and who are not connected persons in relation to the labour broker;

the labour broker provides to any of its clients the services of another labour broker; or the labour broker is contractually obliged to provide a specified employee of the labour broker to the client.

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Payments made to persons who render services to or on behalf of a labour broker without an exemption certificate are subject to the deduction of employees tax. A labour broker that is a company without an exemption certificate and a personal service company cannot be a small business corporation. For further information refer to the PAYE Guidelines and Interpretation Note No. 35 (Issue 2) 11 December 2007 available on the SARS website. Note: Deductions (1) Limitation of deductions. The deduction of expenses incurred by the personal service company, personal service trust or labour broker without an exemption certificate is limited to the amounts paid to the employees of such company, trust or labour broker for services rendered that will comprise taxable income in the hands of the employees. (2) In the case of a personal service company or personal service trust the following expenses will also be allowed as deductions y y y certain legal costs, bad debts, contributions to pension/provident funds/medical schemes; operating expenses in respect of premises; and finance charges/insurance/repairs/fuel/maintenance in respect of assets, if such premises/assets are used wholly and exclusively for purposes of trade.

(d) Independent Contractors The concept of an independent trader or independent contractor remains one of the more contentious features of the Fourth Schedule to the IT Act. An amount paid or payable for services rendered or to be rendered by a person in the course of a trade carried on by him/her independently of the person by whom the amount is paid or payable is excluded from remuneration for employees tax purposes. 27

However, a person is deemed not to be carrying on a trade independently if the services are required to be performed mainly at premises of the person by whom the above amount is paid or payable or of the person to whom such services were or are to be rendered and the person who rendered or will render the services is subject to control or supervision as to the manner in which his/her duties are performed or as to his/her hours of work; or he/she employs three or more full-time employees throughout the year of assessment who are on a full-time basis engaged in the business of the person rendering that service (other than any employee who is a connected person). An amount paid to a person who is deemed not to carry on a trade independently will constitute remuneration and will be subject to the deduction of employees tax. For more information, refer to Interpretation Note No. 17 (issue 2) 9 January 2008 and PAYE Guidelines available on the SARS website.

2.4.4 Provisional tax Provisional tax is not a separate tax but simply a provision for the taxpayers final income tax liability for a year of assessment, which will be determined upon assessment. Compulsory provisional tax payments are made six months after the beginning of a year of assessment and at the end of the year of assessment and represent income tax, calculated on the estimated taxable income anticipated for the year of assessment. The provisional taxpayer must fill in his/her estimated taxable income and provisional tax payable on an IRP 6 form which he/she must submit to SARS. Payment of provisional tax must be made directly to SARS or via banks (see 2.1.7). A provisional taxpayer is any person who derives income which does not constitute remuneration as defined in the 4th Schedule to the IT Act; or 28

an allowance or advance in terms of section 8(1) of the IT Act;

any person who derives income from the carrying on of any business; a company/close corporation (see 2.10.1); and any person who is notified by the Commissioner that he/she is a provisional taxpayer

Note: Every person who is a provisional taxpayer must within 30 days after the date on which he/she becomes a provisional taxpayer, apply to SARS for registration as a provisional taxpayer. The following natural persons are exempt from the payment of provisional tax: (1) A natural person (other than a director of a private company) who is 65 years of age or older on the last day of the year of assessment and his/her taxable income for that year does not exceed R80 000; consists only of remuneration, interest, dividends or rental from letting of fixed property; and he/she does not carry on any business (The above concession applies only to provisional tax. Such natural person may still be liable for income tax if his/her net remuneration plus other income (excluding exempt income) exceeds R74 000 for the year.) (2) A natural person who is under the age of 65 years on the last day of the year of assessment and who does not derive any income from the carrying on of any business, if his/her taxable income for the relevant year of assessment does not exceed the income tax threshold of R46 000; or his/her taxable income for the relevant year of assessment which is derived from interest, dividends and rental from letting of fixed property for the year of assessment does not exceed R20 000.

Provisional taxpayers (other than companies) with taxable income exceeding R50 000 may make a third voluntary provisional tax payment (often called the topping-up payment). This is to enable the taxpayer to pay the difference between the sum of PAYE and provisional tax already paid for the year of assessment and the full
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income tax liability for that particular year. This payment must be made within seven months after the end of the year of assessment if the year-end falls on the last day of February. If the accounting yearend as approved by the Commissioner ends on another date, the taxpayer is required to settle the total income tax liability within six months after that year-end. Failure to do so may result in interest being levied and a penalty being imposed on any underpayment of provisional tax. In the case of an overpayment of provisional tax, interest is payable to the taxpayer. Provisional tax tables are sent to provisional taxpayers annually and are also available from SARS offices. For further information see Guidelines for Provisional Tax (IRP 12) available on the SARS website.
2.4.5 Income of spouses The IT Act define a spouse in relation to any person as a person who is a partner of such person in a marriage, customary relationship or union recognised as a marriage in terms of the laws of SA or any religion. The definition also includes a same-sex or heterosexual relationship which the Commissioner is satisfied is intended to be permanent. Spouses married out of community of property are taxed separately on their individual incomes. In the case of spouses married in community of property, under South African common law, income received accrues to the joint estate and is treated as being received in equal shares by each spouse. However a salary from a third party is treated as being the income of the spouse who receives that salary; as far as passive income (investment income) originating from assets forming part of the joint estate, is concerned, the provisions of the IT Act merely confirm the legal position between the spouses married in community of property. Income derived from the letting of property or

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income other than from carrying on a trade (for example, investments) is split equally between the spouses; income earned from carrying on a trade jointly or where spouses are trading in partnership will accrue to each partner according to the agreed profit-sharing ratio; income which does not form part of the joint estate of both spouses is treated as being income of the spouse entitled to it; benefits from pension, provident and retirement annuity funds are taxable in the hands of the spouse who is the member of the fund; income from patents, designs, trademarks and copyrights is treated as being the income of the holder or owner. expenses incurred in the production of income are deductible to the extent to which that income accrued to the spouses; in the case of pension fund or retirement annuity fund contributions, the contributions are deducted in the hands of the spouse who made the contributions and who is the member of the fund; and expenditure incurred (for example, medical expenses), will be deductible in the hands of the spouse who paid the expenses, notwithstanding the fact that the funds for the expenses may have come from the joint estate. These provisions must not in any way be seen as favouring spouses married in community of property over spouses married out of community of property. It is rather a case of harmonising the existing rights with regard to property and income of couples married in community of property. There are also measures to prevent income splitting that apply to spouses whether they are married in and out of community of property. The income of one spouse may not be treated as being the income of the other spouse. This provision prevents income splitting between spouses in order to obtain an unfair tax advantage. These deeming provisions also apply to donations, settlements and other dispositions between spouses, where income is derived by one spouse (recipient) as a result of a donation made by the other spouse (donor) with the purpose of avoiding tax; or as a result of a transaction, operation or a scheme entered into or carried out by the donor with the sole or main purpose of reducing, postponing or avoiding the donors liability for tax. 31

Where a spouse (recipient) derives excessive income from any trade which is connected to the trade of the other spouse (donor); a partnership of which the donor is a partner; or a company in which the donor is a principal shareholder,

and the income so earned is excessive having regard to the nature of the trade and the recipients participation, the amount that is regarded as excessive will be taxed in the hands of the donor.

2.4.6 Allowable deductions General deduction formula The general deduction formula provides the general rules an expense must comply with in order to be deductible for income tax purposes. Other provisions of the IT Act allow for special deductions. If no special deduction applies, the expense in question will have to comply with the general deduction formula. The general deduction formula provides that for expenditure and losses to be deductible they must be h actually incurred; h during the year of assessment; h in the production of income; h not of a capital nature; and h laid out or expended for the purposes of trade. It should be noted that deductions of expenditure claimed against income from employment (remuneration) derived by employees and office holders, are limited. This limitation, however, does not apply in respect of agents and representatives whose remuneration is normally derived mainly in the form of commission based on sales or turnover attributable to that agent or representative. For further information refer to Interpretation Note No. 13 (issue 2) 30 March 2005 available on the SARS website. Home office expenses Home office expenses (expenses referred to that part of the house used for the purposes of trade) will be allowed as a deduction provided certain requirements are met. 32

Expenses relating to the taxpayers home office may be claimed as a deduction for income tax purposes if a part of the taxpayers home is occupied for purposes of his/her trade and that part is regularly and exclusively used for purposes of his/her trade; and the part so used or occupied is specifically equipped for purposes of his/her trade. If the taxpayers trade is employment or the holding of an office no deduction is allowed unless the income derived from that employment or office is mainly (that is more than 50% of the taxpayers total income from employment or office) commission or other variable payments which are based on the taxpayers work performance and his/her duties are not performed mainly in an office provided by the taxpayers employer; or the taxpayers duties are mainly performed in that part of the taxpayers home. If the above requirements are met the taxpayer will be entitled to claim a portion of his/her total home expenses that relate to that part of his/her home used for business purposes, as a deduction against his/her income. Typical home expenses may include rent of the premises, interest on bond, rates and taxes, cost of repairs or maintenance to the property, etc. These expenses may be apportioned on the following basis: A/B x Total Costs where: A = The area in m of the area specifically equipped B and used regularly and exclusively for trade = The total area in m (including any outbuildings and the area used for trade) of the taxpayers home Total Costs = Total home expenses referred to above

Example The total area (square metres) of the taxpayers home office is 20 sq. metres in relation to the total area of his/her home which is 200 sq. metres. 33

The percentage area of the home office in relation to the total area of his/her home is, therefore, 10% (20/200). The taxpayer will, therefore, be entitled to claim 10% of his/her total home expenses as a deduction for income tax purposes.

Employees and office holders may claim the limited deductions listed below: (a) Pension fund contributions (i) Current pension fund contributions An amount which does not exceed the greater of 7,5% of the remuneration received during the year from retirement-funding employment; or R1 750. employment is the portion of the Retirement-funding

remuneration that is used to calculate the contributions to a pension or provident fund. Any excess may not be carried forward to the following year of assessment. (ii) Arrear contributions These are the amounts paid in respect of past periods taken into account as pensionable service. Maximum of R1 800 per year - Any excess over R1 800 may be carried forward to the following year of assessment.

(b) Retirement annuity fund contributions (i) Current contributions An amount which does not exceed the greater of 15% of the remaining amount after the deduction from income (excluding income derived from retirementfunding employment, any retirement lump sum benefit and retirement lump sum withdrawal benefit) the deductions or assessed losses admissible against such income (excluding deductions in respect of contributions to a retirement annuity fund, expenditure incurred as a lessor of land let for farming purposes, in respect of soil erosion, medical, donations to approved bodies and 34

certain capital development expenditure referred to in the First Schedule to the IT Act): or R3 500 less allowable current pension fund contributions; or R1 750 Any excess may be carried forward to the following year of assessment. (ii) Arrear contributions A maximum of R1 800 per year may be claimed. Any excess over R1 800 may be carried forward to the following year of assessment.

(c) Donations to approved bodies A deduction for donations made to approved bodies (such as a PBO) carrying on certain public benefit activities as set out in Part II of the Ninth Schedule to the IT Act is limited to 10% of taxable income (excluding any retirement fund lump sum benefit and retirement lump sum withdrawal benefit) as determined before allowing any deduction in respect of donations or medical deduction. (For more information see the PBO Guide available on the SARS website.)

(d) Medical deduction Medical expenses, contributions to medical schemes and physically disability expenses paid by the taxpayer (other than amounts recoverable from medical schemes) may be claimed in respect of the taxpayer, his/her spouse, his/her children or any dependant of the taxpayer.

Persons 65 years of age or older If the taxpayer is 65 years of age or older he/she may deduct all his/her contributions to a registered medical scheme, all qualifying medical expenses and physical disability expenses necessarily incurred and paid. In other words, there is no limit.

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Handicapped persons If the taxpayer, his/her spouse or his/her child is a handicapped person as defined in section 18(3) of the IT Act (see below), the taxpayer will be allowed to deduct all his/her contributions to a registered medical scheme, all qualifying medical expenses and physical disability expenses necessarily incurred and paid. For the purposes of section 18 a handicapped person means a blind person as contemplated in the Blind Persons Act, 1968; a deaf person, being a person whose hearing is impaired to such an extent that he cannot use it as a primary means of communication; a person who as a result of a permanent disability requires a wheelchair, calliper or crutch to assist him to move from one place to another; a person who requires an artificial limb; or a person who suffers from a mental illness as defined in section 1 of the Mental Health Care Act, 2002.

Persons under 65 years of age If the taxpayer is under 65 years of age he/she may claim the following expenses as a deduction: (a) any contributions to a registered medical scheme in respect of the taxpayer, his/her spouse and any dependant, as long as it does not exceed (i) R570 per month in respect of the taxpayer; or dependant; or (iii) R1 140 per month in respect of the taxpayer and one dependant, plus R345 for every additional dependant. The amounts in (i) to (iii) above must be reduced by any amount contributed by the employer of the taxpayer to such fund which has not been included as a taxable benefit in the taxpayers remuneration; and 36 (ii) R1 140 per month in respect of the taxpayer and one

(b) the total of o any contributions to a registered medical scheme which have not been allowed as a deduction under item (a) above; o any qualifying medical expenses and physical disability expenses; and o contributions by the employer to a medical scheme taxed as a taxable benefit, as exceeds 7,5% of the taxpayers taxable income (excluding any retirement fund lump sum benefit and retirement lump sum withdrawal benefit) before allowing any deduction under this subparagraph (subparagraph (b)). Note: The contributions by the employer that exceed the amounts in (a) above, as the case may be, will be a taxable benefit received by the taxpayer. For more information see the Tax Guide on the Deduction of Medical Expenses available on the SARS website.

(e) Wear and tear Wear and tear may be claimed on assets not of a permanent nature that are used for the purposes of trade. For example, where it is essential for a taxpayer to maintain a library, a wear and tear allowance of 33% calculated on a straight line basis is allowable. Wear and tear may also be claimed as a deduction on assets such as computers, furniture and fittings, motor vehicles, etc used for purposes of trade. Assets costing less than R5 000 may be written off in full in the year in which they are acquired.

(f) Premiums paid in respect of an insurance policy for loss of income The deduction of insurance policy premiums is limited to insurance policies to the extent that it covers the taxpayer against the loss of income as a result of illness, injury, disability or unemployment and to the extent that the amounts payable in 37

terms of that policy constitute or will constitute income as defined in the IT Act.

(g) Bad and doubtful debts incurred in respect of employment Note: Deductions under items (b), (c), (d), (e), (f) and (g) above may also be claimed by taxpayers against income other than remuneration such as from business, rent or interest.

2.4.7 Prohibited deductions Domestic/private expenses A taxpayer is prohibited from deducting any of the following expenses and payments in terms of the general deduction formula: x x The cost incurred in the maintenance of the taxpayer, his/her family or his/her establishment. Domestic or private expenses, including the rent of, repairs of, or expenses in connection with any premises not occupied for the purposes of trade or of any dwelling or house used for domestic purposes, except in respect of those parts as may be occupied for the purposes of trade.

Part of house not used for the purposes of trade Bribes, fines or penalties A payment for a bribe, fine or penalty will not be allowed as a for income tax purposes if x the payment, agreement or offer to make that payment constitutes an activity contemplated in Chapter 2 of the Prevention and Combating of Corrupt Activities Act, No. 12 of 2004; or x the payment is a fine charged or penalty imposed as a result of carrying out an unlawful activity in SA or in another country where the activity would be unlawful had it been carried out in SA. deduction

2.4.8 The taxation of taxable benefits Any payment received in respect of employment is included in an employees gross income in terms of the definition of gross income. However, certain taxable benefits flowing from employment are not paid in cash and a cash 38

equivalent of these benefits in kind needs to be determined. Any contribution made by an employee will reduce the amount so determined in respect of the taxable benefit. Where the taxable benefit is an amount paid to or for the benefit of an employee, that amount forms part of the remuneration of the employee. The deemed value of other taxable benefits, such as company owned residential accommodation or the use of a company motor vehicle is calculated by way of a formula. The IT Act provides specific provisions contained in the Seventh Schedule to the IT Act for the calculation of the value that must be placed upon each taxable benefit that accrues to an employee. Note: The Commissioner uses market value for some types of taxable benefits and cost price for others.

(a)

Allowances Allowances are generally paid to employees to meet expenditure incurred on behalf of an employer. The portion of the allowance not expended for business purposes must be included in the employees taxable income. The most common types of allowances are travelling, subsistence and uniform allowances.

Travelling allowance Motor vehicle travelling allowances are taxable but expenses for business travel may be set-off against the allowance received. Travel between home and a place of business is regarded as private travel and is not considered to be business travel. Business expenses may be claimed by keeping acceptable records and proof of actual costs, or by using the tables provided by SARS. The tables make provision for a fixed, fuel and maintenance cost per kilometre. If no record of actual business kilometres travelled is kept, the first 18 000 km are regarded as private travel. In that case not more than 14 000 km may be claimed for business purposes. The business related claim depends on the total actual kilometres travelled during the year of assessment. If the motor vehicle has been used for a period of less 39

than 12 months during that year, these distances are reduced proportionately. Where the employee interchangeably uses more than one motor vehicle for business purposes and one or more of those motor vehicles were not primarily used for business purposes, the provisions pertaining to the 18 000 km deemed private kilometres and 32 000 km maximum distance used in the calculations apply separately to each motor vehicle. In order to prove that any motor vehicle was primarily used for business purposes, the taxpayer will have to keep an accurate record of the total distance travelled for business purposes.

Subsistence allowance A subsistence allowance is normally paid to employees to enable them to meet expenses incurred in respect of accommodation and meals when away from their normal place of residence for at least one night on business. For each day or part of a day in the period during which an employee is absent from his/her place of residence, an amount calculated at the following rates, will be deemed to have been actually expended h where the accommodation to which that allowance or advance relates is in SA, an amount equal to R73.50 per day if that allowance or advance is paid or granted to defray the incidental costs only; or R240 per day if that allowance or advance is paid or granted to defray the cost of meals and incidental costs; h where the accommodation to which that allowance or advance relates is outside of SA, an amount equal to US$215 per day if that allowance or advance is paid or granted to defray the cost of meals and incidental costs. Where the allowance exceeds this amount, the full amount of the allowance must be included in the employees income and actual expenses incurred must be claimed against that allowance.

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Uniform allowance The value of the uniform or the amount of the allowance made by the employer to the employee in lieu of any such uniform must be included in the employees gross income. The value of the uniform or the amount of the allowance will be exempt from income tax (and therefore deducted from the gross income in arriving at the employees income), provided that the employee is required as a condition of his/her employment to wear a special uniform while on duty and the uniform is clearly distinguishable from ordinary clothing.

(b)

Benefits in kind Benefits in kind include, for example, the use of free or cheap accommodation, right of use of a company motor vehicle, the acquisition of an asset at a consideration below cost, free or cheap services, private use of an asset, low-interest loans, housing subsidies and redemption of loans due to third parties.

Residential accommodation This includes normal residential accommodation as well as holiday accommodation. The benefit arises when the employee has been provided with residential accommodation whether unfurnished with power or fuel; or furnished but power or fuel is not supplied; or furnished and power or fuel is supplied.

Any residential accommodation supplied by the employer as a benefit or advantage or as a reward for services rendered (or to be rendered) is valued at the greater of (a) (b) the cost borne by the employer, less any amount paid by the employee; or by utilising the formula laid down in the Seventh Schedule to the IT Act, which is based on a percentage of remuneration, less any amount paid by the employee (see Annexure A, Example 4).

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Notes: (1) Where, by reason of the situation, nature or condition of accommodation or any factor, the market-related rental value of the accommodation is lower than the amount arrived at by way of the above formula, the market-related rental value is taken into account for income tax purposes. In such an instance, the employer must approach the local SARS office to confirm whether the market-related rental value may be used. (2) Where a foreign employee has been provided with residential accommodation in SA, the benefit will be taxable in the hands of that employee for the duration of his/her employment in SA. However, there is an exclusion to this rule contained in paragraph 9(7A) of the Seventh Schedule to the IT Act, which provides that no value must be placed on the accommodation provided by the employer to the employee where the employee is away from his/her usual place of residence outside SA a) for a period not exceeding 2 years from the date of arrival of that employee in SA for the purpose of performing the duties of his/her employer; or b) if the accommodation is provided to that employee during the year of assessment and that employee is physically present in SA for a period less than 90 days in that year In terms of paragraph 9(7B) of the Seventh Schedule to the IT Act the abovementioned exclusion does not apply (i) if that employee was present in SA for a period exceeding 90 days during the year of assessment immediately preceding the date of arrival referred to in paragraph 9(7A) of the Seventh Schedule to the IT Act; or (ii) to the extent that the cash equivalent of the value of the taxable benefit exceeds an amount of R25 000 multiplied by the number of months during which subparagraph 9(7A) of the Seventh Schedule to the IT Act applies. (3) The formula will apply where the full ownership vests in the employer; or 42

does not vest in the employer and it is customary for an employer to provide free or subsidised accommodation to its employees; and it is necessary for the particular employer, having regard to the kind of employment, to provide free or subsidised accommodation for the proper performance of the duties of the employee; or as a result of the frequent movement of employees; or due to lack of employer-owned accommodation; and the benefit is provided for bona fide business purposes other than the obtaining of a tax benefit.

(4)

Where the employee has an interest in the accommodation the greater of the formula or the cost borne by the employer will apply to determine the value of the taxable benefit.

Use of a company motor vehicle for private purposes The value of a company motor vehicle made available to an employee for private use is included in gross income as a taxable benefit. It is calculated at 2.5% per month of the determined value (as defined in the Seventh Schedule to the IT Act). Where the employee does not receive a travelling allowance or advance and the employee bears the cost of all fuel used for the purposes of private travel (including travelling between the employees place of residence and his/her place of employment) the value of such private use for each month is reduced by 0.22%; or the full cost of maintaining the vehicle (including the cost of repairs, servicing, lubrication and tyres) the value of such private use for each month is reduced by 0.18%. Where more than one vehicle is made available to that employee or his/her family, and all the motor vehicles are not used primarily for business purposes, the benefit is 2.5% per month on the determined 43

value of the vehicle with the highest value and 4% per month on the other vehicle(s). Note: The determined value generally excludes finance charges, interest and value-added tax.

Interest-free or low-interest loans The difference between the actual amount of interest charged and the interest charged at the official rate (12% from 1 March 2008 to 31 August 2008 and 13% from 1 September 2008 to 28 February 2009) is to be included in gross income.

Share options and other rights to acquire marketable securities Gains made by directors of companies or employees by the exercise, cession or release in respect of rights to acquire marketable securities such as stock, debentures and shares are regarded as income. Note: These gains are subject to the deduction of PAYE.

Equity instruments From 26 October 2004 persons are taxed on any gain or loss on the vesting of an equity instrument acquired as a result of employment or holding of office as a director. The taxable amount is the difference between the market value on date of vesting and any consideration for the acquisition. Equity instruments are equity shares, members interests, options to acquire those shares or interests and other financial instruments convertible into those shares or interests. An equity instrument vests on acquisition of an unrestricted instrument or as a general rule the date when all restrictions which prevent the instrument to be freely disposed of cease to have effect. Note: These gains are subject to the deduction of PAYE.

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Broad-based employee share plans

Equity shares acquired by persons under a qualifying share plan are not taxed on condition that the person does not dispose of the shares within five years from the date of grant thereof. A person may not be granted shares in terms of the share plan which are worth more than R9 000 during a period of three years of assessment.

Relocation costs
Any benefit an employee may have enjoyed by reason of the fact that his/her employer has borne certain expenditure incurred in consequence of the employee's relocation from one place of employment to another or on the appointment of the employee or on the termination of the employees employment, may be exempt from tax. The above list is not exhaustive. For more information see PAYE Guidelines available on the SARS website.

2.4.9 Pensions DTAs generally provide that a pension will be taxed in the country where the pensioner resides, except in the case of Government pensions, which are taxable in the country paying such pension. However, the country that has the right to tax the pension may, in its domestic tax legislation, choose to exempt the pension from income tax, for example, section 10(1)(gC) of the IT Act. The following pensions are exempt from income tax in SA: 1) 2) 3) 4) War veterans pensions. Compensation in respect of diseases contracted by persons employed in mining operations. Disability pensions paid under section 2 of the Social Assistance Act, 1992 (Act No. 59 of 1992). Compensation paid in terms of the Workmens Compensation Act, 1941 (Act No. 30 of 1941) or the Compensation for Occupational Injuries and Diseases Act, 1993 (Act No. 130 of 1993). 5) Pension paid in respect of the death or disablement caused by any occupational injury or disease sustained or contracted by an employee 45

before 1 March 1994 in the course of employment, where that employee would have qualified for compensation under the Compensation for Occupational Injuries and Diseases Act, 1993, had that injury or disease been sustained or contracted on or after 1 March 1994. 6) Compensation paid by the employer, in addition to the compensation mentioned in 4 above, in respect of the death of the employee which arose out of and in the course of employment. Note: The tax exemption of such additional compensation may not exceed R300 000 less the sum of amounts exempted from tax in terms of section 10(1)(x) of the IT Act, whether in the current or any previous year of assessment. 7) 8) Any amount received by or accrued to any resident under the social security system of any other country. Any pension received by or accrued to any resident from a source outside SA, which is not deemed to be from a source in SA, in consideration of past employment outside SA. The following pensions are taxable in SA: 1) 2) 3) A pension or annuity received by a resident from a pension, provident, or retirement annuity fund, unless one of the exemptions above applies. A pension or annuity received from the South African Government. Where any pension or annuity is payable to any person (whether a resident of SA or not) for services rendered inside and outside of SA and at least two years out of the last ten years of services, prior to the accrual of the pension, were rendered in SA, part of the pension or annuity will be taxable in SA in the ratio of the number of years service inside SA to the total number of years service. (The taxability of the pension may be affected by an agreement for avoidance of double taxation.)

2.4.10 Annuities Annuities received from retirement annuity funds, insurance policies, trusts, estates and purchased annuities are taxable. The capital content of a purchased annuity is exempt from income tax. The certificate issued by the insurance company will reflect the capital content. Annuities are subject to the deduction of PAYE where the source is from SA.

46

Annuities received by residents from abroad (that is, from a source outside SA) are also taxable in SA. (The taxability of the annuity may be affected by a DTA.)

2.4.11 Withholding tax on foreign entertainers and sportspersons With effect from 1 August 2006 South African residents who are liable to pay amounts to foreign entertainers and sportspersons for their performances in SA must withhold tax at a rate of 15% from the gross payments and pay it over to SARS on behalf the foreign entertainers and sportspersons before the end of the month following the month in which the tax was withheld. Failure to withhold and/or to pay it over to SARS will render the resident payer personally liable for the tax. Where it is not possible for the withholding tax to take place (for example, the payer is not a resident of SA), the entertainer or sportsperson who is not a resident of SA will be held personally liable for the 15% tax and must pay it over to SARS within 30 days after the amount is received by or accrued to the foreign entertainer or sportsperson. The 15% is a final tax, which means there will be no need to submit an income tax return. Where an entertainer or sportsperson is not a resident of SA, he/she is employed by a South African employer and he/she is physically present in SA for more than 183 days in aggregate in a 12-month period that commences or ends during a year of assessment, these persons will have to pay income tax on the same basis as South African residents, that is, at the usual income tax rates, which may require the submission of an income tax return. Any person who is primarily responsible for founding, organising or facilitating a performance in SA and who will be rewarded therefor, must notify SARS of the performance within 14 days of concluding the agreement.

2.4.12 Withholding tax on payments to non-residents on the sale of their immovable property in SA With effect from 1 September 2007 a withholding tax is payable by a person (the purchaser) that acquires immovable property in SA from a seller, who is 47

not a resident of SA. The purchaser of the property is required to withhold from the amount which has to be paid for the property an amount equal to 5% of the amount payable, if the seller is an individual; 7,5% of the amount payable, if the seller is a company; or 10% of the amount payable, if the seller is a trust

The seller may apply for a directive that no amount/a reduced amount be withheld if certain conditions are met as set out in section 35A(2) of the IT Act. The amount withheld is an advance (credit) against the sellers income tax liability for the year of assessment, during which the property was disposed of. The withholding tax is not payable if the total amount payable for the immovable property does not exceed R2 million. More information is available on the SARS website under CGT Publications.

2.5

Rental income Rental income is taxable. A description of the asset or physical address of the property must be furnished. Expenses such as bond interest, rates and taxes, insurance and repairs may be claimed subject to certain conditions.

2.6

Investment income (a) Dividends Dividends received by or accrued to any person, whether a resident of SA on not a resident of SA, from South African resident companies are exempt from income tax. Dividends received by or accrued to a person who is not a resident of SA from Collective Investment Schemes are also exempt from income tax in the circumstances described in the paragraph below under Interest. On the other hand, dividends received by or accrued to residents from foreign companies are generally taxable. The following are some of the most important exemptions in respect of foreign dividends received by or accrued to a person: Dividends declared by a company that is not a resident of SA, listed on the JSE, provided that more than 10% of the total equity share capital is held by residents collectively. 48

Dividends from a foreign company if the resident holds at least 20% of the total equity share capital and voting rights in that foreign company or 20% of the total members interest and voting rights in the co-operative, declaring the dividend, established in terms of the laws of a country other than SA.

Foreign dividends and foreign interest are exempt up to R3 200 out of the total exemption referred to in the paragraph below under Interest.

The IT Act makes provision for the exemption from income tax of other foreign dividends received by residents from a foreign source in specific circumstances where a South African connection is present or a controlled foreign company is involved. Residents subject to income tax on foreign dividends may claim a credit of foreign tax paid on the dividends against their South African income tax liability on the foreign dividends. Resident companies may not claim tax attributable to foreign dividends as a credit in calculating secondary tax on companies.

(b)

Interest

The IT Act makes specific provision for the exemption of interest received by or accrued to any person who is not a resident of SA from a source within SA. In terms of this exemption the full amount of the interest is exempt from income tax. This exemption is not applicable in the following circumstances, namely: In the case of a natural person if that person was physically present in SA for a period exceeding 183 days in aggregate during the year of assessment; or if that person at any time during the year of assessment carried on a business through a permanent establishment in SA. In the case of a person, other than a natural person such as a company if that person at any time during the year of assessment carried on a business through a permanent establishment in SA. All interest received by a resident is taxable. For the 2008/09 year of assessment all interest received by or accrued to an individual from a South African source up to an amount of R19 000 per annum, if he/she is under the age of 65 years and up to an amount of R27 500 per annum, if he/she is at 49

least 65 years of age, is exempt from income tax. The exemption of R19 000 or R27 500 is not applicable on foreign dividends and interest. Note: The R3 200 exemption in respect of foreign dividends and interest, first apply to foreign dividends and in so far as the R3 200 exemption exceeds the amount of such foreign dividends apply in respect of such foreign interest.

2.7

Tax on royalties Amounts received for the imparting of any scientific, technical, industrial or commercial knowledge or information, commonly known as know-how payments are specifically included in the gross income definition, and are therefore taxable in the recipients hands. A final withholding tax of 12% (or a lower rate determined in a relevant agreement for the avoidance of double taxation) is payable in respect of royalties or similar payments made to person who is not a resident of SA for the right of, or the grant of permission to use in SA patents, designs, trademarks, copyright, models, patterns, plans, formulas or processes or any property or right of a similar nature; or any motion picture film, or any film or video tape or disc for use in connection with television, or any sound recording or advertising matter used or intended to be used in connection with such motion picture film, film or video tape or disc. The withholding tax must be paid over to SARS within 14 days after the end of the month during which the liability to pay the royalty was incurred or the said payment was made.

2.8

Restraint of trade A restraint of trade payment made to any individual, labour broker without an exemption certificate, personal service company or personal service trust is regarded as gross income and subject to income tax in the hands of the recipient. Bona fide restraint of trade payments made to other companies or trusts are of a capital nature.

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2.9

Business income Business income received by or accrued to a person who is not a resident of SA from carrying on a trade/business within SA is taxable in SA. The taxability of the income may be affected by an agreement for the avoidance of double taxation. Income derived by a resident from any business or trading activities carried on by him/her outside SA will be subject to income tax in SA. However, this may have the effect that income derived by the resident may be subject to income tax in SA as well as in the country where the trading activities are carried on (the source country). This situation will normally be resolved through the application of a double taxation agreement concluded between the two countries. Normally, profits will be taxed in the country of residence unless the business is carried on in the other country through a permanent establishment. The term permanent establishment is defined in the agreements and generally means a fixed place of business through which the business of the enterprise is wholly or party carried on.

2.10 Companies and businesses 2.10.1 Tax consequences of doing business in a company The shareholder of a company and the company are separate taxable entities. In addition, ownership of the company through ownership of the shares, and management of the day-to-day activities of the company are usually separate. Companies, other than gold-mining companies, small business corporations and employment companies pay tax on their taxable incomes at a flat rate of 28%. Companies, which are not residents of SA as defined in the IT Act, carrying on a trade within SA are taxed at a rate of 33% on income derived from a source within SA. These companies are not subject to STC. 2.10.2 Provisional tax Provisional tax is not a separate tax but simply a provision for the companys final income tax liability for a year of assessment, which will be determined upon assessment. 51

A provisional taxpayer includes a company/close corporation. Note: Every provisional taxpayer must apply to SARS for registration within 30 days after the date on which it becomes a provisional taxpayer. Compulsory provisional tax payments are made six months after the beginning of a year of assessment and at the end of the year of assessment and represent income tax, calculated on the estimated taxable income anticipated for the year of assessment. The company must fill in its estimated taxable income and provisional tax payable on an IRP 6 form which must be submitted to SARS. Payment of provisional tax must be made directly to SARS or via any bank specified in 2.1.7. Companies with taxable income exceeding R20 000 may make a third voluntary provisional tax payment (often called the topping-up payment). This is to enable the company to pay the difference between provisional tax already paid for the year of assessment and its full income tax liability for that particular year of assessment. This payment must be made within seven months after the end of the year of assessment if the year-end falls on the last day of February. If the accounting year-end as approved by the Commissioner ends on another date, the company is required to settle its total income tax liability within six months after that year-end. Failure to do so may result in interest being levied and a penalty being imposed on any underpayment of provisional tax. In the case of an overpayment of provisional tax, interest is payable to the company. Provisional tax tables are sent to provisional taxpayers annually and are also available from SARS offices. For further information see Guidelines for Provisional Tax (IRP 12) available on the SARS website.

2.10.3 Controlled foreign companies (CFCs) A controlled foreign company (CFC) is any foreign company where more than 50 per cent of the total participation rights in that foreign company are held, or more than 50 per cent of the voting rights in that foreign company are directly or indirectly exercisable, by one or more residents.

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The concept of participation rights in relation to a foreign company is defined as (a) the right to participate directly or indirectly in the share capital, share premium, current or accumulated profits or reserves of that company, whether or not of a capital nature; or (b) in the case where no person has any right in that foreign company as contemplated in paragraph (a) above or no such rights can be determined for any person, the right to exercise any voting rights in that company. The application of section 9D of the IT Act results in an amount equal to the net income of the CFC being imputed and taxed in the hands of South African residents except where a resident (together with any connected person in relation to that resident) in aggregate holds less than 10% of the participation rights and may not exercise at least 10% of the voting rights in that CFC. The ratio of the net income to be determined for any one resident is the proportion that the residents participation rights bears to all the participation rights in the company. The net income of a CFC in respect of a foreign year of assessment is defined as an amount equal to the taxable income of that company, determined in accordance with the provisions of the IT Act as if that CFC had been a taxpayer and as if that company had been a resident for purposes of the definition of gross income section 1 of the IT Act and certain other sections of the IT Act and certain paragraphs of the Eighth Schedule to the IT Act. Section 9D of the IT Act only targets certain types of income namely: Passive, investment type income: Dividends Interest Royalties Rental income Annuities Capital gains on assets from which the above income is or could be earned 53

Income resulting from transactions with connected persons who are residents, which require adjustments for non arms length pricing. Diversionary income of a CFC which is derived from: The sale by a CFC of certain goods to a connected person who is a resident The sale by a CFC of certain goods where the CFC purchased those goods or intermediary inputs from connected persons who are residents The performance of certain services by a CFC to a connected person who is a resident

Any other income which is not attributable to a foreign business establishment.

Globally these types of income are referred to as tainted income. In respect of these types of income a calculation of taxable income must be performed. The net income calculation is performed in the CFCs currency of financial reporting and the end result must be translated to rand by applying the average exchange rate for the year of assessment during which the net income is included in the residents income. In certain instances, the CFC rules do not apply and amounts need not be attributed to the resident holding the qualifying participation rights in the CFC concerned. To determine whether specific exclusions apply, a proper study of the section containing these rules (section 9D) is required. Subsection 9D(10) allows for a ruling system in terms of which the Commissioner can grant waivers for various requirements regarding foreign business establishments on a case-by-case basis. Any ruling issued by the Commissioner under these circumstances will generally be subject to the same procedures, terms and conditions as a SARS binding private ruling (with appropriate modifications). The waivers can be divided into the following categories: Business establishment waiver for related CFC group employees, equipment and facilities. Diversionary transaction waiver for centrally located operations. 54

Passive income waiver for active royalties. Diversionary transaction and passive income waiver for high-taxed income. Financial services comparably-taxed waiver.

2.10.4 Small Business Corporations (SBCs) The SBC tax legislation allows two major concessions to private companies, close corporations and co-operatives which comply with all of the following requirements all the shareholders or members must at all times during the year of assessment be natural persons (individuals); non of the shareholders or members holds any shares or has any interest in the equity of any other company, other than o a company contemplated in paragraph (a) of the definition of listed company in section 1 of the IT Act; o a participatory interest in a collective investment scheme (see definition of company in section 1 of the IT Act); o a company contemplated in section 10(1)(e)(i);(ii) or (iii) of the IT Act (body corporates); o less than 5% of the interest in a social or consumer co-operative or a co-operative burial society as defined in section 1 of the Cooperative s Act, 2005 (Act No. 14 of 2005), or any other similar cooperative if all the income derived from the trade of that cooperative during any year of assessment is solely derived from its members; o any friendly society as defined in section 1 of the Friendly Societies Act, 1956 (Act No. 25 of 1956); or o less than 5% of the interest in a primary savings co-operative bank or a primary savings and loans co-operative bank as defined in the Co-operatives Banks Act, 2007, that may provide, participate in or undertake only the following in the case of a primary savings co-operative bank, banking services contemplated in section 14(1)(a) to (d) of the abovementioned Act; and

55

in the case of a primary savings and loans co-operative bank, banking services contemplated in section 14(2)(a) or (b) of the above-mentioned Act;

the gross income of the SBC for the year of assessment may not exceed R14 million; not more than 20% of the total of all receipts and accruals (other than those of a capital nature) and all capital gains of the SBC may consist collectively of investment income and income from rendering a personal service ; and

the SBC may not be an employment company (that is, a labour broker without an exemption certificate or a personal service company).

Investment income consists of, for example interest, dividends, royalties, rental in respect of immovable property, annuities or income of a similar nature; interest contemplated in section 24J of the IT Act, (other than interest earned by a co-operative bank), amounts contemplated in section 24K of the IT Act; and any proceeds derived from investment/trading in financial instruments/marketable securities or immovable property. Personal service is any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health, secretarial services, sport, surveying, translation, valuation or veterinary, if the service is performed personally by a person who holds an interest in that SBC; and that SBC does not throughout the year of assessment employ three or more full-time employees (other than any employee who is a shareholder of that SBC, or who is a connected person in relation to a shareholder) who are on a full-time basis engaged in the business of that SBC rendering that service. An SBC which is engaged in the provision of personal services will still qualify for the relief if it throughout the year of assessment employs three or more

56

full-time employees who are on a full-time basis engaged in the business of the SBC rendering that service. The first concession is to be taxed on the basis of progressive rate system, viz SBCs pay income tax at a rate of 0% on the first R46 000 of taxable income, 10% on taxable income in excess of R46 000 but not exceeding R300 000 and thereafter at a rate of 28% for every R1 in excess of R300 000. The second concession is the immediate write-off of all plant or machinery brought into used for the first time by the SBC for purpose of its trade (other than mining of farming) and is used by the SBC directly in a process of manufacture or similar process in the year of assessment. Furthermore, an accelerated write-off allowance for depreciable assets (other than manufacturing assets) acquired on or after 1 April 2005 is available at 50% of the cost of the asset, in the year of assessment during which that asset was first brought into,use, 30% in the second year of assessment and 20% in the third year of assessment. An SBC can elect to either claim the above 50:30:20 deductions or the wear and tear allowance under section 11(e) of the Act. (See also under Special Allowances, 2.10.4) For more information refer to the Tax Guide for Small Businesses and Interpretation Note No.9: Small Business Corporations available on the SARS website.

2.10.5 Special allowances (a) Industrial buildings Wear and tear is normally not allowed on buildings or other structures of a permanent nature. However, an allowance equal to 5% (20-year straight-line basis) of the cost to the taxpayer of industrial buildings or of improvements to existing industrial buildings used in a process of manufacture (other than mining or farming) is granted. This allowance was increased to 10% only in respect of industrial buildings erected during the period 1 July 1996 and 30 September 1999 and brought into use before 31 March 2000.

57

(b)

Commercial buildings An allowance equal to 5% (20-year straight-line basis) of the cost to the taxpayer of new and unused buildings/improvements to buildings (other than the provision of residential accommodation) which were contracted for on or after 1 April 2007 and the construction, erection or installation of which commenced on or after the above-mentioned date. With effect from 21 October 2008: For the purposes of the above 5% allowance, where a taxpayer acquires a part of a building without erecting or constructing that part, the percentages below will be deemed to be the cost incurred (a) (b) 55% of the acquisition price, in the case of a part being acquired; and 30% of the acquisition price, in the case of an improvement being acquired.

(c)

Hotel keepers Buildings and improvements An allowance equal to 5% (20-year straight-line basis) of the cost to the taxpayer of such building and improvements Any improvements which have or are commenced on or after 17 March 1993 which does not extend the existing exterior framework of the building An allowance equal to 20% (5-year straight-line basis) of the cost to the taxpayer of such improvements. Machinery/improvements/utensils/articles An allowance equal to 20% (5-year straight-line basis) of the cost to the taxpayer of such assets. The assets must be owned by the taxpayer or acquired as purchaser in terms of an instalment credit agreement as defined in the VAT Act.

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(d)

Aircraft/ships An allowance equal to 20% (5-year straight-line basis) of the cost to the taxpayer of such aircraft/ships. The assets must be owned by the taxpayer or acquired as purchaser in terms of an instalment credit agreement as defined in the VAT Act. Rolling stock (that is, trains and carriages) An allowance equal to 20% (5-year straight-line basis) of the cost incurred by the taxpayer in respect of rolling stock brought into use on or after 1 January 2008. The assets must be owned by the taxpayer or acquired as purchaser in terms of an instalment credit agreement as defined in the VAT Act and must be used directly by the taxpayer wholly/mainly for the transportation of persons, goods or things.

(e)

(f)

Certain pipelines, transmission lines and railway lines Pipelines for transporting of natural oil An allowance equal to 10% (10-year straight-line basis) of the cost incurred by the taxpayer in respect of the acquisition of the new or unused asset. The assets must be owned by the taxpayer and brought into use for the first time by the taxpayer and used directly by the taxpayer for the transportation of natural oil.

Pipelines for transportation of water used by power stations An allowance equal to 5% (20-year straight line basis) of the cost by the taxpayer in respect of the acquisition of the new or unused asset The asset must be owned and be brought into use for the first time by the taxpayer and used directly by the taxpayer for the transportation of water used by power stations in generating electricity. 59

Electricity transmission lines An allowance equal to 5% (20-year straight-line basis) of the cost incurred by the taxpayer in respect of the acquisition of the new or unused asset. The assets must be owned by the taxpayer and brought into use for the first time by the taxpayer and used directly by the taxpayer for the transmission of electricity.

Telephone transmission lines An allowance equal to 5% (20-year straight-line basis) of the cost incurred by the taxpayer in respect of the acquisition of the new or unused asset. The assets must be owned by the taxpayer and brought into use for the first time by the taxpayer and used directly by the taxpayer for the transmission of telecommunication signals.

Railway lines An allowance equal to 5% (20-year straight-line basis) of the cost incurred by the taxpayer in respect of the acquisition of the new or unused asset. The assets must be owned by the taxpayer and brought into use for the first time by the taxpayer and used directly by the taxpayer for transportation persons/goods/things.

(g)

Airport assets That is any new or unused aircraft hangar, apron, runway or taxiway on any designated airport (including any earthworks or supporting structures forming part of such hangar, apron runway or taxiway). An allowance equal to 5% (20-year straight-line basis) of the cost actually incurred by the taxpayer in respect of the acquisition of such asset brought into use on or after 1 January 2008.

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(h)

Port Assets That is any new or unused port terminal, breakwater, sand trap, berth, quay wall, bollard, graving dock, slipway, single point mooring, dolos, fairway, surfacing, wharf, seawall, channel, basin, sand bypass, road, bridge, jetty or off-dock container depot, and (including any earthworks or supporting structures forming part of the aforementioned). An allowance equal to 5% (20-year straight-line basis) a year of the cost of new and unused assets, brought into use on or after 1 January 2008.

(i)

Machinery, plant implements, utensils and articles (other than farming/manufacturing/small business corporations) An allowance equal to the amount which the Commissioner may think just and reasonable which the value of the asset has been diminished by reason of wear and tear or depreciation Small items costing less than R5 000 purchased on or after 1 March 2006 may be written off in full in the year of acquisition. The assets must be owned by the taxpayer or acquired as purchaser in terms of an instalment credit agreement as defined in the VAT Act. For more information, see Practice Note No. 19 30 April 1993 available on the SARS website.

(j)

Machinery or plant (manufacture or similar process)

An allowance equal to 20% (5-year straight-line basis) of the cost to the taxpayer to acquire such machinery or plant. This allowance is increased in respect of new or unused machinery or plant acquired on or after 1 March 2002 and brought into use by the taxpayer in its manufacture or similar process carried on in the course of its business on or after that date to
40% of the costs to the taxpayer of the machinery or plant in year of assessment during which the machinery or plant was brought into use; and 61

20% of the costs to the taxpayer of the machinery or plant in each of the three subsequent years of assessment.

The assets must be owned by the taxpayer or acquired as purchaser in terms of an instalment credit agreement as defined in the VAT Act.
(k) Plant or machinery (SBCs) Plant and machinery (process of manufacturing or similar process) A deduction equal to 100% of the cost of any plant or machinery brought into use in the year of assessment for the first time and used in a process of manufacture. Machinery, plant, implement, utensil, article, aircraft or ship (other than plant or machinery used in a process of manufacturing or similar process) An accelerated allowance for the above assets acquired by the SBC on or after 1 April 2005 at o 50% of the cost of the asset in the year of assessment during which it was first brought into use; o o 30% in the second year of assessment; and 20% in the third year of assessment.

An SBC can elect to either claim the above 50:30:20 deductions or the wear and tear allowance under section 11(e) of the IT Act. The assets must be owned by the taxpayer or acquired as purchaser in terms of an instalment credit agreement as defined in the VAT Act. For more information see 2.10.3.

(l)

Patents, inventions, copyrights, designs, other property, etc An allowance is allowed in respect of expenditure incurred to acquire (otherwise than by way of devising, developing or creating) the following property (i) invention or patent as defined in the Patents Act, 1978 (Act No.57 of 1978); 62

(ii) (iii) (iv)

design as defined in the Designs Act, 1993 (Act No. 195 of 1993); copyright as defined in the Copyright Act, 1978 (Act No. 98 of 1978); other property which is of a similar nature (other than Trade Marks as defined in the Trade Marks Act, 1993 (Act No. 194 of1993); or knowledge connected with the use of such patent, design, copyright or other property or the right to have such knowledge imparted.

The allowance is allowed in the year of assessment in which the abovementioned property is brought into use for the first time by the taxpayer for the purposes of the taxpayers trade. Where the expenditure exceeds R5 000, the allowance will not exceed in any year of assessment (a) 5% of the expenditure in respect of any invention, patent, copyright or the property of a similar nature or any knowledge connected with the use of such invention, patent, copyright or other property or the right to have such knowledge imparted; or (b) 10% of the expenditure of any design or other property of a similar nature or any knowledge connected with the use of such design or other property or the right to have such knowledge imparted.

(m)

Research and development The deduction of research and development (R&D) will be allowed at a rate of 150% of expenditure incurred in respect of activities undertaken in SA directly for purposes of the discovery of novel, practical and non-obvious information; or the devising, developing or creation of any invention, design, computer program or knowledge essential to the use of that invention, design or computer program, which is of scientific or technological nature. The deduction in respect of any building, machinery, plant, implement, utensils and article brought into use for the first time by the taxpayer for R&D purposes will be allowed at the rate of: 63

50% of the cost of the asset in the first year of assessment; 30% in the 2nd year of assessment; and 20% in the 3rd year of assessment.

The cost of the building will be reduced where the building is also used for purposes other than R&D. For more information see section 11D of the IT Act.

(n)

Urban Development Zones Taxpayers investing in one of the 15 demarcated urban development areas receive special depreciation allowances for construction or refurbishment of commercial and residential buildings located in these areas that are used solely for trade purposes. These areas are located within the boundaries of the municipalities of Buffalo City, Cape Town, Ekurhuleni, Emalahleni, Emfuleni, eThekwini, Johannesburg, Mangaung, Mbombela, Msunduzi, Nelson Mandela, Polokwane, Sol Plaatje, Tshwane and Matjhabeng. The allowances are: in respect of the cost (or deemed cost in respect of a building purchased from a developer) of the erection of any new building or part thereof or the extension of or addition to any building or part thereof, an amount equal to 20% of the cost thereof to the taxpayer in the year of assessment that building or part thereof is erected, extended or added to is brought into use by the taxpayer solely for the purpose of that taxpayers trade; and 5% of the cost in each of the 16 succeeding years of assessment (in respect of an erection, extension, addition or improvement that commenced on or after 21 October 2008, the allowance was increased to 8% of the cost in each of the 10 succeeding years of assessment) ; and in respect of the cost (or deemed cost in respect of a building purchased from a developer) of improvements (including any

64

extension or addition which is incidental to that improvements) to any existing building, an amount equal to 20% of the cost thereof to the taxpayer in the year of assessment in which the building or part thereof so improved, extended or added to is brought into use by the taxpayer solely for the purpose of that taxpayers trade; and 20% of that cost in each of the four succeeding years of assessment. Where a building purchased from a developer, only a certain percentage of the purchase price will be deemed to be costs incurred by the purchaser in respect of the erection, extension, addition to or improvement of the building or part of the building, namely

55% of the purchase price of the building or part thereof, in the case of a new building erected, extended or added to by the developer; and

30% of the purchase price of the building or part of the building, in the case of a building improved by the developer.

With effect from 21 October 2008: In the case of the erection of any new building or the extension of or addition to a building, to the extent that it relates to a low-cost residential unit (i) 25% of the cost to the taxpayer in the year of assessment during which the building is brought in use by the taxpayer; (ii) 13% of the cost in each of the five succeeding years of assessment; and (iii) 10% of the cost in the year of assessment following the last year contemplated in (ii). In the case of the improvement of any existing building or part of a building, to the extent that it relates to a low-cost residential unit, where the existing structural or exterior framework thereof is preserved (i) 25% of the cost to the taxpayer; and (ii) 25% of the cost in each of the three succeeding years.

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For purposes of the above allowances, that is, in respect of both buildings and low-cost residential units, where the taxpayer purchased part of a building from a developer the percentages below will be deemed to be the costs incurred (a) 55% of the purchase price of that part of a building, in the case of a new building erected, extended or added to by the developer; and (b) 30% of the purchase price of that part of a building, in the case of a building improved by the developer For more information see the Guide to the UDZ Tax Incentive available on the SARS website.

(o)

Plant or machinery used for storing/packing farming products by any agricultural co-operative An allowance equal to 20% (5-year straight-line basis) of the cost to the taxpayer to acquire the asset. The assets must be owned by the taxpayer or acquired as purchaser in terms of an instalment credit agreement as defined in the VAT Act.

(p)

Learnership Agreements An allowance where a) the employer during the year of assessment entered into a registered learnership agreement with a learner in the course of any trade carried on by that employer; or b) the learner completed during the year of assessment a registered learnership agreement entered into by the employer with that learner during the year or any previous year of assessment in the course of any trade carried on by that employer. The allowance in respect of the entering into a learnership agreement as contemplated in (a) above is (i) in the case of a learner who was at the time of entering into that agreement employed by the employer, the lesser of (aa) in the case of a learnership with a duration of (A) less than 12 months, 70% of the total remuneration of that learner for the period of that learnership as stipulated in the employment agreement; or 66

(B)

12 months or more, 70% of the annual equivalent of the remuneration of that learner stipulated in the employment agreement; or

(bb) R20 000; or (ii) in the case of a learner who was at the time of entering into the agreement not employed by the employer, the lesser of (aa) in the case of a learnership with a duration of (A) less than 12 months, the total remuneration of that learner for the period of that learnership as stipulated in the agreement of employment; or (B) 12 months or more, the annual equivalent of the remuneration of that learner stipulated in the agreement of employment; or (bb) R30 000. The allowance in respect of the completion of a learnership agreement as contemplated in (b) above is the lesser of (i) in the case of a learnership with a duration of (aa) less than 12 months, the total remuneration of that learner for the period of that learnership as stipulated in the agreement of employment; or (bb) 12 months or more, the annual equivalent of the remuneration of that learner stipulated in the agreement of employment; or (ii) R30 000.

Disabled persons Given the additional expenses associated with employing disabled persons as learners, a more favourable allowance has been introduced in respect of contracts entered into on or after 1 July 2006. The allowances are set out below. If the learner is a disabled person at the time of entering into the learnership agreement, the amount of the allowance in respect of (a) a registered learnership agreement entered into by the employer with the learner who at the time of entering into that agreement (i) was employed by the employer, is the lesser of 67

(aa) in the case of a learnership agreement with a duration of (A) less than 12 months, 150% of the total amount of the remuneration of the learner for the period of the learnership agreement as stipulated in the agreement of employment; or (B) 12 months or more, 150% of the annual equivalent of the remuneration of that learner stipulated in the agreement of employment; or (bb) R40 000; or (ii) was not employed by the employer, is the lesser of (aa) in the case of a learnership agreement with a duration of (A) less than 12 months, 175% of the total amount of the remuneration of the learner for the period of the learnership agreement stipulated in the agreement of employment; or (B) 12 months or more, 175% of the annual equivalent of the remuneration of the learner stipulated in the agreement of employment; or (bb) R50 000; and (b) the allowance at the completion of the registered learnership agreement, is the lesser of (i) in the case of a learnership agreement with a duration of (aa) less than 12 months, 175% of the total remuneration of the learner for the period of the learnership agreement stipulated in the agreement of employment; or (bb) 12 months or more, 175% of the annual equivalent of the remuneration of the learner stipulated in the agreement of employment; or (ii) R50 000. A disabled person means a person who falls within the definition of people with disabilities as contained in section 1 of the Employment Equity Act, No. 55 of 1998.

68

For more information see Interpretation Note No. 20 (issue 2) 30 March 2007 and the Guide to the Tax Incentive in respect of Leanership Agreements available on the SARS website.

(q)

Machinery, plant, implements, utensils and articles used in farming or production of renewable energy Farming An allowance equal to 50% of the cost to the taxpayer of the asset in the year of assessment (first year of assessment) in which the asset is so brought into use; 30% of such cost in the 2nd year of assessment; and 20% of such cost in the 3rd year of assessment.

Production of bio-fuels An allowance, in respect of these assets to be used for the production of bio-fuels (bio-diesel and/or bio-ethanol), equal to 50% of the cost to the taxpayer of the asset in the year of assessment (first year of assessment) in which the asset is so brought into use; 30% of such cost in the 2nd year of assessment; and 20% of such cost in the 3rd year of assessment.

Generation of electricity An allowance in respect of these assets to be used in the generation of electricity from wind; sunlight; gravitational water forces to produce electricity of not more than 30 megawatts; and biomass comprising organic wastes, landfill gas or plants, 50% of the cost to the taxpayer of the asset in the year of assessment (first year of assessment) in which the asset is so brought into use; 30% of such cost in the 2nd year of assessment; and 69 equal to

20% of such cost in the 3rd year of assessment.

The assets referred to above must be owned by the taxpayer or acquired by the taxpayer as purchaser in terms of an agreement contemplated in paragraph (a) of an instalment credit agreement as defined in section 1 of the VAT Act.

(r)

Film Owners Special deductions are allowed in the determination of taxable income derived from their trade as film owners. These special deductions are contained in section 24F of the IT Act. For more information, see the guide entitled Taxation of Film Owners available on the SARS website.

(s)

Environmental expenditure Environmental treatment and recycling asset (that is, any new and unused air, water and solid waste treatment and recycling plant or pollution control and monitoring equipment) o An allowance equal to 40% of the cost to the taxpayer to acquire the asset in the year of assessment (first year of assessment) in which the asset is so brought into use; and 20% of such cost in the subsequent 3 years of assessment

Environmental waste disposal asset (that is, any new and unused air, water and solid waste disposal site, dam, dump, reservoir, or other structure of a similar nature, or any improvement thereto) o An allowance equal to 5% (20-year straight-line basis) of the cost to the taxpayer to acquire the asset

Post-trade environmental expenses o A deduction equal to 100% the expenditure or loss incurred in respect of certain decommissioning, remediation or restoration.

70

(t)

Housing for employees 50% of the costs incurred by a taxpayer in connection with housing for his employees for the purposes of trade, limited to R6 000 per dwelling.

(u)

Residential units With effect from 21 October 2008: (i) An allowance equal to 5% of the cost to the taxpayer of new and unused residential unit (or of new and unused improvement to a residential unit) owned by the taxpayer if (a) the unit or improvement is used by the taxpayer solely for the purposes of a trade carried on by the taxpayer; (b) the unit is situated within the RSA; and (c) the taxpayer owns at least five residential units within the RSA, used by the taxpayer for the purposes of a trade carried on by the taxpayer. (ii) An additional allowance of 5% of the cost of a low-cost residential unit of a taxpayer will be allowed if the allowance of 5% (referred to in (i) above) is allowable. (iii) The percentages below will be deemed to be the costs incurred by the taxpayer in respect of a residential unit where the taxpayer acquires a residential unit (or improvement to a residential unit) representing only a part of a building without erecting or constructing the unit or improvement (a) 55% of the acquisition price, in the case of the unit being acquired; and (b) 30% of the acquisition price, in the case of the improvement being acquired.

(v)

Sale of low-cost residential units on loan account With effect from 21 October 2008: A deduction equal to 10% of the amount owing to the taxpayer by the employee in respect of the disposal of a low-cost residential unit by the taxpayer to an employee.

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(w)

Environmental conservation and maintenance expenditure Expenditure incurred by a taxpayer to conserve or maintain land, if (a) the conservation or maintenance is carried out in terms of a biodiversity management agreement that has a duration of at least five years entered into by the taxpayer in terms of the National Environmental Management: Biodiversity Act, No. 10 of 2004; and (b) the land is utilised by the taxpayer for the production of income and for purposes of a trade consists of, includes or is in the immediate proximity of the land that is the subject of the agreement contemplated in (a). Note: The above expenditure must not exceed the income derived by the taxpayer, from a trade carried on by the taxpayer on the land utilised as contemplated in (b). The excess amount will be carried forward and deemed to be a deduction in the next year of assessment. Expenditure incurred by a taxpayer to conserve or maintain land owned by the taxpayer is for purposes of section18A of the IT Act deemed to be a donation, if the conservation or maintenance is carried out in terms of a declaration that has a duration of at least 30 years in terms of the National Environmental Management Protected Areas Act, No. 57 of 2003. If land is declared a national park or nature reserve and the declaration is endorsed on the title deed of the land with a duration of at least 99 years, 10% of the lesser of the cost or market value of the land is for purposes of section 18A and paragraph 62 of the Eighth Schedule to the IT Act deemed to be a donation in the year of assessment in which the land is so declared and each of the succeeding nine years of assessment.

2.10.6 Secondary Tax on Companies (STC) STC is payable by a resident company on the net amount of dividends (that is, the amount by which the dividend declared by the company exceeds the 72

amount of any dividend accrued to the company during a dividend cycle.) Companies which are not residents of SA are exempt from STC. For more information see the Comprehensive Guide to STC available on the SARS website.

2.10.7 Insurance companies (a) Short-term insurance business The ordinary rules for the determination of taxable income apply to a short-term insurer. Short-term insurers are allowed to deduct expenditure incurred in respect of business of insurance, premiums on reinsurance and the actual amount of liability incurred in respect of any claims, less any claims recovered. In addition, allowances subject to the discretion of the Commissioner, in respect of unexpired risks, claims intimated but not paid and claims not intimated nor paid, are allowed.

Allowances claimed as a deduction in a year of assessment must be included as income in the succeeding year of assessment.
(b) Long-term insurance business

The taxation of long-term insurance companies is based on the trustee principle and the recognition that insurers hold and administer certain of their assets on behalf of various categories of policyholders, while the balance of the assets represents the shareholders interests.
These companies are liable for income tax according to the four-fund approach. The application of this approach requires that insurers allocate their assets to separate funds representative of the various policyholders. Each fund is taxed separately as if it had been a separate taxpayer in accordance with the applicable taxation principles. Untaxed policy holder fund exempt from income tax under the provisions of section 10 of the IT Act. Individual policy holder fund 30% Company policy holder fund 28% Corporate fund 28% 73

2.10.8 Mining companies Mining companies are allowed to deduct capital expenditure incurred from taxable income derived from mining operations, but subject to certain limitations as discussed in the paragraph below. Capital expenditure, for example, includes expenditure on shaft sinking and mining equipment. It also includes expenditure on development and general administration prior to the commencement of production or during a period of non-production. The capital expenditure incurred on a particular mine is restricted to the taxable income derived from that mine only. Any excess (unredeemed) capital expenditure is carried forward and is deemed to be capital expenditure incurred during the next year of assessment in respect of the mine to which the capital expenditure relates. Furthermore, the capital expenditure of a mine cannot be set-off against non-mining income such as interest, rental, other trading activities, etc. However, where a new mine commences mining operations after 14 March 1990 its excess (unredeemed) capital expenditure may also be deducted from the total taxable income derived from mining in respect of other mines operated by the taxpayer, as does not exceed 25% of such total taxable income derived from its other mines. The taxable income of a company derived from mining for gold is taxed in accordance with a special formula (see 2.16). These companies may elect to be exempt from STC and are taxed at a higher rate of tax. A company which derives taxable income from other mining operations is taxed at the same rate (28%) as is applicable to other companies and is not exempt from STC. Taxpayers conducting mining operations are required to rehabilitate areas where mining has taken place. These taxpayers are, therefore, required to make provision for rehabilitation expenses during the life of the mine. Amounts paid in cash to rehabilitation funds are allowed as a deduction for income tax purposes.

Oil and gas companies As from the years of assessment commencing on or after 2 November 2006 special rules apply for tax purposes to oil and gas companies regarding their income tax rates, STC, exploration/production/capital expenditures, losses, etc. 74

For more information see the Tenth Schedule to the IT Act.

2.10.9 Shipping and aircraft Income derived by a resident who is a ship or aircraft owner or charterer is taxable in SA. Where any foreign taxes have been paid, these may be claimed as a credit against the South African income tax liability. Apart from taxable income derived from other sources, a ship or aircraft owner or charterer who is not a resident of SA is deemed to have derived taxable income from passengers, or loading livestock, mail or goods embarked in SA equal to 10% of the amount payable to him or an agent on his behalf, no matter whether the amount is payable in or outside of SA. That ship or aircraft owner or charterer will be assessed accordingly. However, this will not apply if the ship or aircraft owner or charterer renders accounts that satisfactorily disclose the actual taxable income derived from the business. It should be noted that any ship or aircraft owner or charterer who is not a resident of SA is exempt from taxation in SA, if a similar exemption or equivalent relief is granted by the country of which that owner or charterer is resident, to any South African resident in respect of any tax imposed in that country on income which may be derived by that South African resident from carrying on in that country any business as any ship or aircraft owner of or charterer. Furthermore, provisions dealing with these aspects are generally contained in agreements for the avoidance of double taxation (see 2.2.4).

2.10.10 Farming Farming operations include livestock farming, crop farming, milk production, plantation farming, sugar cane farming and game farming. Any person carrying on farming operations is required to account for the value of livestock and produce on hand at the beginning and end of a year of assessment in their income tax return. The values to be placed on livestock at the beginning and end of the year of assessment are the standard values as prescribed by regulation. (These values also appear in the tax brochures). Produce, on the other hand, must be accounted for at cost of production or market value, whichever is the lower. 75

Game is also regarded as livestock, but due to practical difficulties that can be encountered in establishing the actual numbers of game on hand at any given time, game is excluded from opening and closing stock. Game farmers must prove that the game is purchased, bred and sold on a regular basis with a genuine intention to carry on farming operations profitably in order to qualify as game farmers. Note: Income relating to accommodation and catering facilities for visitors does not qualify as income from farming operations and separate financial statements must be drawn up for such income. Special concessions for farmers The deduction of capital expenditure, such as the development of and improvements to farming property, is permitted in the determination of taxable income. This deduction may not exceed the taxable income from farming operations in respect of that year of assessment. If the amount of such expenditure exceeds the taxable income in that year, the balance will be carried forward and deducted in the succeeding year of assessment, subject to the same limitation. Further information is also obtainable from SARS offices or from the SARS website. The cost of farming machinery, plant, implements, utensils or articles used by a farmer in farming operations or production of renewable energy is written off at the following rates: First year of use : Second year Third year : : 50% 30% 20%

Special measures in determining taxable income of farmers Since a farmers income can fluctuate considerably from year to year, the IT Act contains provisions whereby the farmer may be taxed on the basis of his/her annual average taxable income from farming in the current and previous four years of assessment. 76

Relief is also given to farmers whose income for any year of assessment includes income derived from the disposal of plantation and forest produce; the abnormal disposal of sugar cane as a consequence of damage to cane fields by fire; the disposal of livestock sold on account of drought; or excess profits as a result of farming land acquired by the State or certain juristic persons.

2.10.11 Deductions in respect of expenditure and losses incurred prior to commencement of trade (pre- trade costs) Taxpayers are entitled to a deduction for pre-trade costs incurred before the commencement of trade. Pre-trade costs are not defined but they would include costs such as advertising and marketing promotion, insurance, accounting and legal fees, rent, telephone, licences and permits, market research and feasibility studies, but excludes capital costs such as the purchase of buildings and motor vehicles. It also includes pre-trade research and development expenses in terms of section 11B or 11D of the IT Act. Pre-trade costs incurred prior to the commencement of trade can only be set off against income from that trade.

2.11 Donations tax (and PBOs) Donations tax (not a tax on income) is payable by a person who is a resident, who made a donation, (the donor) to another person (donee). Donations tax is calculated at a rate of 20% on the value of the property disposed of. Each individual is allowed to make exempt donations totalling R100 000 per year of assessment. Where the donor is not an individual, the exemption is limited to an amount not exceeding R10 000 in respect of casual gifts. 77

Where a donor makes more than one donation during the year of assessment, the exemption is calculated according to the order in which the donations took effect.

Donations to certain persons (see section 56 of the IT Act) such as public benefit organisations (PBO) and recreational clubs are also exempt from the payment of donations tax.

Donations to approved bodies (such as a PBO) carrying on certain public benefit activities are exempt from donations tax, subject to certain conditions (see 2.4.6). For more information see the Tax Exemption Guide for Public Benefit Organisations in South Africa available on the SARS website.

Donations between spouses are also exempt from donations tax. Where two individuals draw up a joint will and the survivor accepts (adiates) the conditions of the joint will at the death of the first dying, the difference in value between the survivors property, which falls into the massed estate, and the benefit derived from that estate is regarded as a donation.

Where two individuals are married in community of property and property is donated by one of the spouses, that donation is deemed to have been made in equal shares if that property falls within the joint estate of the spouses. If that property was excluded from the joint estate of the spouses, that donation is treated as having been made solely by the spouse making the donation.

Where any property has been disposed of for a consideration which, in the opinion of the Commissioner, is not an adequate consideration, that property is treated as having been disposed of under a donation.

If the donor fails to pay the tax within the prescribed period (within three months or longer period as the Commissioner may allow), the donor and 78

the donee (whether a resident or not) are jointly and severally liable for the tax.

2.12

Capital gains tax (CGT) A capital gain arises when the proceeds from the disposal of an asset exceed the base cost of that asset. A capital loss occurs when an asset is disposed of and the base cost of that asset exceeds the proceeds from that disposal. CGT only comes into effect when the taxpayer disposes of an asset. The taxable capital gain forms part of a taxpayers taxable income and must be declared in the income tax return for the year of assessment in which the asset is disposed of.

2.12.1 Introduction

2.12.2 Registration A person need not register separately for CGT if already registered as a taxpayer for income tax purposes. Where a persons sole source of taxable income comprises a taxable capital gain, it will be necessary for that person to register as a taxpayer at a SARS branch office. For example, this may occur when that person, who is not a resident of SA, has no South African source income, disposes of immovable property in SA.

2.12.3 Rates Individuals and special trusts For individuals and special trusts 25% of the net capital gain, is included in his/her/its taxable income and is subject to income tax at the marginal rate of tax of the individual and special trust. Companies and trusts (other than special trusts) For companies and trusts that are not special trusts 50% of the net capital gain is included in its taxable income and subject to income tax at the company rate of 29%, or in the case of a trust (other than a special trust), at 40%.

79

Effective rate of tax The effective rate of tax on a capital gain ignoring the annual exclusion (which is only applicable to individuals and special trusts) and any assessed capital loss brought forward from the previous year is as follows: Individuals and special trusts: 40% x 25% = 10% (assuming that the top marginal rate of tax applies) Companies 28% x 50% = 14% Trusts that are not special trusts: 40% x 50% = 20%

2.12.4 Capital losses Capital losses may only be set off against capital gains. Any capital loss that is not utilised in the current year of assessment is carried forward to the next year of assessment as an assessed capital loss and may be set off against any capital gains in that year of assessment.

2.12.5 Disposal CGT is triggered by the disposal of an asset. The word disposal is described very widely see paragraph 11 of the Eighth Schedule to the IT Act. Events that trigger a disposal include a sale, donation, exchange, loss, death and cessation of residence in SA.

2.12.6 Exclusions Some capital gains or losses (or a portion thereof) is excluded for CGT purposes. The following are some of the specific exclusions: R1,5 million gain/loss on the disposal of a primary residence. Most personal belongings which are not used for the carrying on of a trade. Examples include motor vehicles, caravans, furniture and jewellery. Any gain or loss on disposal of a motor vehicle in respect of which you receive a travel allowance. Retirement benefits. An amount received in respect of a long-term insurance policy where you were the original owner.

80

Only in the case of individuals and special trusts, the first R16 000 of the sum of gains and losses in a year of assessment (known as the annual exclusion).

The annual exclusion increases to R120 000 in the year of death.

2.12.7 Base cost The base cost of an asset is the amount the taxpayer paid for the asset plus whatever other cost was incurred directly related to buying it, selling it, or improving it. The base cost does not include any amount otherwise allowed as a deduction for income tax purposes. Some of the main costs that may form part of the base cost of an asset are the price the taxpayer originally paid to buy the asset; transfer costs, stamp duty, VAT paid and not claimed or refunded on the asset; cost of improvements to the asset; advertising costs to find a buyer or seller; the cost of having the asset valued in order to determine a capital gain or loss; costs directly relating to the buying or selling of the asset, for example, fees paid to a surveyor, broker, agent or consultant for services rendered; cost of establishing, maintaining or defending a legal title or right in the asset; cost of moving the asset from one place to another upon acquisition or disposal; and cost of installing the asset, including the cost of foundations and supporting structures. The taxpayer does not have to pay income tax on the full profit when an asset owned before 1 October 2001 is disposed of. The base cost of the asset as at 1 October 2001 must be determined, and only the difference between the proceeds and that base cost is subject to CGT. The base cost of an asset acquired before 1 October 2001 may be determined according to one of the following methods (a) 20% x (proceeds less any expenditure incurred on or after the valuation date);

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(b)

the market value of the asset on 1 October 2001 (the valuation date) plus any expenditure incurred on or after the valuation date. (The valuation must have been carried out before 30 September 2004.); or

(c)

the time-apportionment method which is based on the following formula: TAB = B + [(P B) x N]/(T + N)

Note: 1. The symbols used in the above formula are as follows: B = Expenditure incurred before 1 October 2001 P = Amount determined using the proceeds formula P = R x B/ (A + B); or where the formula does not apply, the proceeds. Proceeds must be reduced by any selling expenses incurred on or after 1 October 2001. R = Amount received or accrued from disposal of asset (less any selling expenses) A = Expenditure incurred on or after 1 October 2001 N = Number of years from the date that the asset was acquired to the date before valuation date T = Number of years from the valuation date until the date the asset was disposed of 2. The proceeds formula must be applied where expenditure (excluding selling expenses) has been incurred before and after the valuation date. 3. Parts of a year are treated as a full year for the purpose of determining the periods before and after the valuation date (N and T in the formula). 4. Where expenditure has been incurred in more than one year of assessment before the valuation date, N is limited to 20 years. Example (where the time-apportionment method is used) Zelda bought her holiday home on 1 June 1981 at a cost of R25 000. She sold it on 1 June 2007 for R850 000. Capital expenditure of R50 000 was incurred after 1 October 2001. The market value of the house on valuation date was R550 000. 82

Solution Step 1 Apply proceeds formula (The proceeds formula must be used because Zelda incurred R50 000 in respect of capital expenditure after valuation date.) P = R x B/(A + B) P = 850 000 x 25 000/(50 000 + 25 000) P = 283 333 Step 2 Determine time-apportionment base cost (TAB) TAB = B + [(P B) x N/(N+T)] TAB = 25 000 + [(283 333 25 000) x 22/28] TAB = 25 000 + 202 976 = 227 976 Step 3 Determine capital gain or loss Capital gain = R850 000 (R227 976 + R50 000) = R572 024 Comment Had Zelda done a valuation, her capital gain would be Proceeds Less: Base cost Market value on 1 October.2001 Capital expenditure Capital gain R250 000 under the market value method. Note: Where there is a loss, the TAB formula will reduce the original cost by the portion of the loss relating to the period before the valuation date. Where no records have been kept, 20% of proceeds [method (a)] or market value [method (b)] must be used. R550 000 R 50 000 (R600 000) R250 000 R850 000

Compare the Capital gain of R572 024 under the TAB method with

2.12.8

Annual exclusion Individuals and special trusts are entitled to an annual exclusion of R16 000. This is the amount of an individuals/special trusts aggregate capital gain or loss that is disregarded for CGT purposes. The annual exclusion is increased to R120 000 where an individual dies during a year of assessment. 83

Note: Companies and trusts (other than special trusts) are not entitled to the annual exclusion.

2.12.9

Small businesses A person who operates a small businesses

2

as sole proprietor, partner or

owner of an interest in a company or close corporation is, subject to certain conditions, entitled to a concession which excludes capital gains of up to R750 000 (during the persons life time) on the disposal of active business assets when the person attain the age of 55 years or the disposal is in consequence of ill-health, other infirmity, superannuation or death. For further information, see paragraph 57 of the Eighth Schedule to the IT Act.

2.12.10 CGT on disposal of property in SA by a person who is not a resident of SA A person who is not a resident of SA must account for capital gains and losses made from the disposal of the following assets: y Immovable property situated in SA or any interest or right in immovable property situated in SA. The term interest in immovable property situated in SA includes a direct or indirect holding of 20% or more of the shares in a company, where 80% or more of the current market value of the shares of that company are directly or indirectly attributable to immovable property situated in SA. Also included as immovable property is a vested interest in a trust where 80% or more of the value of that interest is attributable directly or indirectly to immovable property in SA. y Assets attributable to a permanent establishment in SA (for example a branch of a foreign company in SA)

2.12.11 CGT on disposal of foreign assets by residents Residents are subject to CGT on the disposal of their worldwide assets. The method for determining the capital gain or loss depends on the nature of the
2

For purposes of CGT, a small business means a business of which the market value of all

its assets, as at the date of the disposal of the asset or interest, does not exceed R5 million

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asset. Set out below are some examples of foreign assets and their CGT treatment: y Immovable property held outside SA Where the property is acquired and disposed of in the same foreign currency, the capital gain or loss is determined in the foreign currency and translated to Rand by applying (1) (2) the average exchange rate for the tax year in which the asset was disposed of; or the spot rate on the date of disposal of the asset.

Special rules apply to immovable property bought in one foreign currency and disposed of in another (or where assts are attributable to a foreign permanent establishment and financial reporting is in another foreign currency). y Assets other than immovable property attributable to a foreign permanent establishment The same rules apply as in the case of foreign immovable property as explained above. y Foreign equity instruments (for example, shares and interests in collective investment schemes) and deemed SA source assets (for example, foreign endowment policies and other movable assets)

The capital gain or loss is determined by translating the proceeds

from the sale of the asset into Rand at the average exchange rate for the year of assessment in which the asset was disposed of or at the

spot rate on the date of disposal thereof, and the expenditure

incurred in respect of that asset into Rand at the average exchange rate for the year of assessment during which it was incurred or the spot rate on the date on which it was incurred.

Foreign currency assets and liabilities (foreign bank notes, travellers cheques, bank accounts and foreign loans) Foreign currency notes and coins and travellers cheques used for the regular payment of personal expenses (for example during a holiday) 85

are exempt from CGT. A person is also allowed one foreign bank account (a call or current account) free of CGT, provided that it is used for the regular (that is, monthly) payment of personal expenses. Foreign currency gains and losses on these assets became subject to CGT with effect from 1 March 2003. A foreign currency asset pool must be maintained for each foreign currency for the purpose of determining the base cost of a foreign currency asset. Additions to the pool are made at the average exchange rate in the year of acquisition. When an asset is disposed of its base cost will be the weighted average Rand cost of the pool. Proceeds are translated at the average exchange rate in the year of disposal. Relief from double taxation is granted in the agreement for the avoidance of double taxation between SA and the country of residence of the person who is not a resident taxpayer, where applicable. Further information on CGT is available on the SARS website or from any SARS office.

2.13 Ring-fencing of assessed losses Section 11 of the IT Act currently lays down the general requirements for deducting expenditure and losses to the extent a person derives income from carrying on any trade. Not every activity is a trade, even if intended or labelled by a taxpayer as such. Whether or not an activity is a trade, is a question of law that depends on the facts and circumstances of each case. These facts and circumstances are deliberately left open to accommodate the wide range of trading activities existing in a modern world. However, more often than not, private consumption (that is, a hobby) can be disguised as a trade so that individuals can set off these expenditure and losses against other income such as salary or business income. Due to the above, section 20A was added to the IT Act to prevent expenditure and losses normally associated with suspect (that is, disguised hobbies) activities to be deducted from income. This deduction limitation applies only to natural persons. 86

For more information see the guide entitled Ring Fencing of Assessed Losses Arising from Certain Trades Conducted by Individuals available on the SARS website.

2.14 Dispute Resolution 2.14.1 Objections The procedure for taxpayers who are not satisfied with their assessments is to lodge an objection in writing, stating fully and in detail the grounds on which the objection is lodged. The objection must be in the prescribed form, namely ADR 1 and must be submitted within 30 days after the date of assessment to the SARS office where the taxpayer is registered. This form must be completed as comprehensively as possible, and must include detailed grounds on which the objection is founded with supporting documentation where necessary. It must be signed by the taxpayer. Where the taxpayer is unable to personally sign the objection, the person signing on behalf of the taxpayer must state in an annexure to the objection the reason why the taxpayer is unable to sign the objection; that he or she has the necessary power of attorney to sign on behalf of the taxpayer; and that the taxpayer is aware of the objection and agrees with the grounds thereof.

2.14.2 Appeals If the objection is disallowed wholly or in part, the taxpayer may appeal to a specially constituted Tax Board or to the Tax Court for hearing appeals. The notice of appeal must be in writing and must be made within 30 days of the notice of the disallowance of the objection.

2.14.3 Rules regarding objections and appeals Rules regarding objections and appeals have been formulated, in terms of section 107A of the IT Act, for assessments issued, objections lodged or appeals noted. These rules are available on the SARS website and are also set out in the Guide on Tax Dispute Resolution. Essentially, the rules set 87

timeframes for both SARS and taxpayers adherence in order that objections and appeals may be dealt with in an expeditious manner. It is important to note that objections need to be lodged at the address specified in the assessment in terms of these new rules. Additionally, these rules make provision for alternative dispute resolution.

2.14.4 Alternative Dispute Resolution (ADR) ADR is a form of dispute resolution other than litigation, or adjudication through the courts. It is less formal, less cumbersome and less adversarial and is a more cost effective and speedier process of resolving a dispute with SARS. If a dispute is resolved between SARS and the taxpayer, it must be recorded and be signed by the taxpayer and the SARS representative. SARS will issue, where necessary, a revised assessment to give effect to the agreement reached. Where the dispute is not resolved, the taxpayer may continue on appeal to the Tax Board or the Tax Court. In essence, a taxpayer has three options available when disputing an assessment o where the tax in question does not exceed R500 000 the Tax Board is to be utilised; o where the tax in question is more than R500 000 the Tax Court is to be utilised; or o instead of going to the Tax Board or Tax Court, the ADR process can be used where the Commissioner decides it is appropriate. ADR applies to taxes such as o o o o o o o o o o Income Tax (including PAYE and CGT) VAT Customs and Excise Transfer Duty Stamp Duty Skills Development Levies Unemployment Insurance Contributions Estate Duty Donations Tax Secondary Tax on Companies 88

2.15 Secrecy and confidentiality South Africas tax legislation makes provision for the preservation of secrecy with regard to information that may come to the knowledge of SARS officials in the performance of their duties, except under specifically defined circumstances. For example, information that a serious criminal offence has been or may be committed or information of an imminent and serious public safety or environmental risk may be shared with certain organs of state. Such disclosure, however, may only be made in terms of an order issued by a judge in chambers. The purpose of the secrecy provisions is to encourage taxpayers to make full disclosure of their financial affairs thereby maximising tax compliance, while taxpayers have the peace of mind that their information will remain confidential. A taxpayer may agree to dispense with the secrecy provisions if so desired.

2.16 Tax rates applicable to natural persons, deceased estates, insolvent estates, special trusts, trusts and companies

Taxable income (excluding any retirement lump sum benefit) of any natural person, deceased estate, insolvent estate and special trust Any year of assessment ending on 28 February 2009 (2008/09)

Taxable income Not exceeding R122 000 Exceeding R122 000 but not exceeding R195 000 Exceeding R195 000 but not exceeding R270 000 Exceeding R270 000 but not exceeding R380 000 Exceeding R380 000 but not exceeding R490 000 Exceeds R490 000

Rates of tax 18% of taxable income R21 960 plus 25% of the amount by which the taxable income exceeds R122 000 R40 210 plus 30% of the amount by which the taxable income exceeds R195 000 R62 710 plus 35% of the amount by which the taxable income exceeds R270 000 R101 210 plus 38% of the amount by which the taxable income exceeds R380 000 R143 010 plus 40% of the amount by which the taxable income exceeds R490 000 Amount R8 280 R13 320

Rebates (natural persons only) Below the age of 65 years 65 years or older

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Income tax thresholds (natural persons only) Below the age of 65 years 65 years or older

Amount R46 000 R74 000

Standard Income Tax on Employees (SITE): Level: R60 000

Taxable income comprising of any retirement lump sum benefit accrued to natural persons Any year of assessment ending on 28 February 2009 (2008/09)

Taxable income

Rates of tax

Not exceeding R300 000 18% of taxable income Exceeding R300 000 but not R54 000 plus 27% of the taxable income exceeding R600 000 exceeds R300 000 R135 000 plus 36% of the taxable income Exceeding R600 000 exceeding R600 000 The amount of tax determined (in respect of the retirement lump sum benefit) must be reduced by the amount of tax levied on the person in respect of any previous year of assessment respect of the taxable income comprising any retirement lump sum benefit.

Taxable income of trusts (other than special trusts) Any year of assessment ending on 28 February 2009 (2008/09)

Taxable income On each rand of taxable income

Rate of tax 40%

Taxable income of personal service trusts Any year of assessment ending on 28 February 2009 (2008/09)

Taxable income On each rand of taxable income Taxable income of Corporates

Rate of tax 40%

Companies (Standard)/Close Corporations Any year of assessment ending during the twelve month period ending on 31 March 2009 90

Taxable income On each rand of taxable income

Rate of tax 28%

Secondary Tax on Companies (STC) STC is payable on dividends declared by a resident company after being reduced by dividends accrued to that company during a dividend cycle. A company which is not a resident of SA is exempt from STC. For more information see the Comprehensive Guide to STC available on the SARS website.

From 14/03/1996 01/10/2007

Until 30/9/2007 To date

Rate of STC 12,5% 10%

Small Business Corporations (SBCs) Any year of assessment ending during the twelve month period ending on 31 March 2009

Taxable income Not exceeding R46 000

Rates of tax 0% of taxable income

Exceeding R46 000 but 10% of the amount by which the taxable not exceeding R300 000 income exceeds R46 000 Exceeding R300 000 R25 400 plus 28% of the amount by which the taxable income exceeds R300 000

Mining companies Companies mining for gold (taxed according to one of the following formulae gold mining tax formula) Any year of assessment ending during the twelve month period ending on 31 March 2009

Not exempt from STC Y = 34 (170/x) (Other income taxed at 28%)

Elected to be exempt from STC Y = 43 (215/x) (Other income taxed at 35%) 91

Where

x = the ratio expressed as a percentage Taxable income from gold mining Total revenue (turnover) from gold mining Y = Rate of tax to be levied

Oil and gas companies Rate of tax The rate of tax on taxable income derived from oil and gas income by an oil and gas company that is resident company may not exceed 28% (or an oil and gas company which is not a resident and which solely derives its oil and gas income by virtue of an OP26 right previously held by such company); and is not a resident may not exceed 31%.

Rate of STC The STC rate of an oil and gas company may not exceed 5% on the net amount of dividends declared out of the profits of its oil and gas income. A rate of 0% applies to the net dividend declared by such a company derived from the profits of its oil and gas income solely derived (directly/indirectly) by virtue of an OP26 right previously held. The above rates (0% and 5%) are not applicable where the company is engaged in refining. For more information see paragraphs 2 and 3 of the 10th Schedule to the IT Act.

Other mining companies The rates applicable to ordinary companies also apply to all mining companies, other than companies mining for gold.

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Insurance companies Long-term insurance companies Four fund basis Any year of assessment ending during the twelve month period ending on 31 March 2009

Funds Corporate Fund Individual Policyholder Fund Company Policyholder Fund Untaxed Policyholder Fund: Retirement fund business Other

Taxable income On each rand of taxable income On each rand of taxable income On each rand of taxable income On each rand of taxable income On each rand of taxable income

Rate of tax 28% 30% 28%

(abolished from 1/03/07) 0%

Short-term insurance companies Companies carrying on a short-term insurance business are taxed at the same rate as is applicable to standard companies

Employment companies Personal service company Labour broker that is a company without a labour broker exemption certificate Any year of assessment ending during the twelve month period ending on 31 March 2009

Taxable income On each rand of taxable income

Rate of tax 33%

Companies which are not residents of SA A company which is not a resident as defined in section 1 of the IT Act Any year of assessment ending during the twelve month period ending on 31 March 2009

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Taxable income On each rand of taxable income Tax holiday companies

Rate of tax 33%

A tax holiday company is a company which qualified for a tax holiday status in terms of section 37H of the IT Act. Companies could only apply for approval, for tax holiday status, until 30 September 1999. Any year of assessment ending during the twelve month period ending on 31 March 2009

Taxable income On each rand of taxable income

Rate of tax 0%

Note: Tax holiday companies are exempt from STC.

Public benefit organisations/recreational clubs A public benefit organisation (PBO) which is approved in terms of section 30(3) of the IT Act, or recreational club which is approved in terms of section 30A(2) of the IT Act. A PBO is partially taxable on its trading receipts as from its first year of assessment commencing on or after 1 April 2006. A recreational club is partially taxable on its trading receipts as from its year of assessment commencing on or after 1 April 2007

If the PBO or recreational club is a company Any year of assessment ending during the twelve month period ending on 31 March 2009

Taxable income On each rand of taxable income

Rate of tax 28%

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If the PBO or recreational club is a person other than a company Any year of assessment ending during the twelve month period ending on 28 February 2009

Taxable income On each rand of taxable income

Rate of tax 28%

3 3.1

VALUE-ADDED TAX (VAT) Introduction Value-added tax (VAT) is levied on the supply of goods and services by vendors (persons who are or are required to be registered under the VAT Act) throughout the business cycle. Effectively, VAT is levied on the value-added by an enterprise. VAT is also levied on the importation of goods as well as on the supply of imported services into SA.

3.2

Rates VAT is levied at the standard rate of 14%, but certain supplies are subject to the zero-rate or are exempt from VAT. VAT is levied on an inclusive basis, which means that VAT has to be included in all prices on products, price lists, advertisements and quotations.

3.3

Who is liable for the payment of VAT? VAT is levied on all supplies made by vendors in the course or furtherance of their enterprises. Only a vendor may levy VAT. A vendor making exempt supplies may, therefore, not charge VAT and may not claim back any VAT borne by the enterprise. Any person who carries on an enterprise and whose total value of taxable supplies (taxable turnover) exceeds, or is likely to exceed, the compulsory VAT registration threshold (VAT threshold), must register for VAT purposes. The VAT threshold was R300 000 in any 12 moth consecutive period. As from 1 March 2009 the VAT threshold was increased to R1 million in any 12 month consecutive period. .A vendor making taxable supplies of less than the VAT threshold per annum, but more than R20 000 per annum is not obliged to register as a vendor, but may nevertheless apply for voluntary registration. Enterprises making taxable 95

supplies of less than R20 000 per annum cannot register for VAT but excludes the following any person who intends to carry on an enterprise from a specified date, where the enterprise will be supplied to that person as a going concern and the total value of taxable supplies made by the supplier of the going concern has exceeded R20 000 in the previous 12 months; any person who carries on an enterprise of a welfare organisation, share block company or a municipality supplying specific goods or services as listed in the VAT Act; or any person who carries on an enterprise where as a result of the nature of the activity, the person can reasonably be expected to make taxable supplies exceeding R20 000. The taxable supplies will therefore only be made after a period of time. In the case of vendors supplying commercial accommodation, the R20 000 is increased to R60 000. It must be borne in mind that it may be to the advantageous of persons to register if they supply goods or services mainly to other vendors so as to allow the purchasing vendor to claim the VAT incurred on the supply, (that is, input tax). Where the person supplies mainly services to non-vendors (that is, persons who are not registered for VAT), it will generally not be to the advantageous of that person to voluntarily register for VAT. In addition, where a person makes exempt supplies, that person will not be conducting an enterprise for VAT purposes and will therefore not be able to register. When a vendor is supplied with goods or services by another vendor, VAT is levied by the supplier of those goods or services. The vendor acquiring the goods subtracts the input tax (VAT borne by the vendor) from the output tax (VAT charged by the supplying vendor). The difference is VAT payable to/refundable by SARS. The effect is that VAT is borne by the final consumer of goods and services.

96

3.4 Presumptive tax an alternative to VAT registration

As part of Governments broader mandate to encourage entrepreneurship and create an enabling environment for small businesses to survive and grow, a presumptive tax is introduced to reduce the tax compliance burden on micro businesses with a turnover of up to R1 million per annum. The simplified tax system is essentially an alternative to the current income tax and VAT systems, meaning that a micro business still has the option to use the conventional tax system. It will be available to sole proprietors, partnerships, close corporations, companies and cooperatives with effect from 1 March 2009 and applicable in respect of a year of assessment commencing on or after that date. 3.5 Items subject to the standard rate The standard rate of 14% applies to the supply of most goods and services supplied by vendors. The importation of most goods and imported services (that is, services acquired for the purposes other than making taxable supplies) are also subject to VAT at the standard rate. 3.6 Items subject to the zero-rating The following are examples of goods and services that are subject to VAT at the zero-rate: Goods exported from South Africa where the vendor is liable for the transport of the goods to the foreign country Brown bread Brown wheaten meal Maize meal Samp Mealie rice Dried mealies Dried beans Rice Lentils Fruit and vegetables Pilchards and sardinella in tins or cans Milk, cultured milk and milk powder Vegetable cooking oil Eggs 97

Edible legumes and pulse of leguminous plants Dairy powder blends Petrol, diesel and illuminating paraffin Certain supplies made to VAT registered farmers of certain agricultural inputs Certain gold coins issued by the S A Reserve Bank, including Kruger Rands International transport and related services Services physically supplied outside South Africa.

Zero-rating implies that VAT at 0% is levied on supplies made by the vendor. VAT incurred on goods or services acquired by the vendor for purposes of making zero-rated supplies, is claimable as input tax.

3.7

Exemptions The following are examples of goods and services that are exempt from VAT: Financial services Passenger transport by road and rail The rental of residential accommodation Certain educational services Medical services and medicines supplied by State and provincial hospitals and municipal clinics The supply of any goods or services by an employee organisation to its members to the extent that the consideration consists of membership contributions

Child minding services in crches and after-school centres.

An exemption implies that the supplier of goods does not levy VAT on those exempt supplies but must bear VAT on purchases incurred in making such supplies.

3.8 3.8.1

Tourists, diplomats and exports to foreign countries Tourists VAT borne by foreign tourists may be refunded by the VAT Refund Administrator (VRA) upon departure from SA. The tourist must be in possession of a valid tax invoice and have the goods available for inspection 98

upon departure from SA. An administration fee of 1,5% of the VAT inclusive amount of the claim, subject to a minimum of R10 and a maximum of R250, is levied by the VRA for processing the refund.

Details of VRA Head Office and offices at points of departure from South Africa Country RSA JIA North side office JIA South side office Sandton CPT Airport CPT Waterfront VRA Head Office Beitbridge Lebombo 011 390 1655 011 390 2545 011 784 7399 021 934 8675 021 405 4545 011 394 1117 015 530 0113 013 793 8178 Telephone number

NAMIBIA Vioolsdrift Nakop Windhoek Regional Office 027 761 8002 054 571 0011 092 64 612 30773

SWAZILAND Golela Mananga Oshoek Mahamba Jeppes Reef Mbabane Regional Office 034 435 1014 013 793 8442 017 882 0024 017 826 4611 013 781 0530 092 68 404 7193

BOTSWANA Gaborone Regional Office Groblersburg - Customs Skilpadshek - Customs Ramatlabamba - Customs Kopfontein 092 67 3170 892 014 767 1019 018 364 1469 018 393 0240 018 365 9021 99

3.8.2

Diplomats VAT relief is granted to certain diplomatic and consular missions in the form of a refund of VAT borne on official purchases.

3.8.3

Exports to foreign countries A vendor may apply the zero-rate when supplying movable goods and consigning or delivering them to a recipient at an address in an export county. If a person who is not a resident of SA or foreign enterprise purchases goods in SA and subsequently exports the goods, the VAT may be refunded by the VAT Refund Administrator. Furthermore, in certain circumstances the vendor may apply the zero-rate where the goods are exported by the foreign purchaser or his/her/its cartage contractor, provided that the goods are exported by sea or air. The vendor must obtain documentary proof of export as required under Part Two of the VAT Export Incentive Scheme. More information is available in the VAT Guide for Vendors (VAT404).

3.8.4

Small Retailers VAT Package o What is the Small Retailers VAT Package? The Small Retailers VAT Package is a simpler VAT option for small retailers and forms part of SARS drive to assist certain small businesses. If you qualify for this Package it means that you can satisfy the VAT Act without detailed recordkeeping or having to buy expensive cash registers to keep track of sales on the various types of products you sell. This Package also includes a free set of pre-printed books in which you keep track of the stock you buy and your daily sales. In short, you get to spend more time and money growing your business. This is not only important for the success of your business, but also supports the continued growth of our economy. o Why was the Small Retailers VAT Package introduced? To make it simpler for small retailers who are registered for VAT

100

SARS recognises that small retailers find it difficult and time consuming to keep the detailed sales records required by the VAT Act. The Small Retailers VAT Package is designed to cut through these problems and make accounting for VAT simpler for small retailers. To make it simpler for small retailers who are not registered for VAT to satisfy the law All retailers who have a turnover in excess of the compulsory VAT registration threshold per year must register for VAT. There are many small retailers who should register for VAT but do not. However, SARS recognises that this is often due to a lack of knowledge or because small retailers feel that the process is too complicated and time consuming. While this is not a valid excuse for not registering, SARS has tried to resolve the problem by introducing the Small Retailers VAT Package. Unregistered retailers are thus encouraged to register for VAT and apply for the Small Retailers VAT Package. To reduce VAT fraud SARS is aware that some retailers abuse VAT through dishonest reporting of sales information. There are also retailers who knowingly avoid registering for VAT when they are required to do so. These practices are regarded as serious criminal acts and SARS will increase its audit activity among retailers to identify such retailers. Who qualifies for the Small Retailers VAT Package? If you are not registered for VAT, you will first have to register for VAT before you can apply for the Small Retailers VAT Package. You can do so by visiting a SARS office or by calling the SARS Call Centre on 0860 12 12 18. Alternatively, visit the SARS website for more information. If you are already registered for VAT, you qualify for the Small Retailers VAT Package only if you satisfy the requirements to become an approved vendor. 101

To be an approved vendor you must o sell standard-rated goods (that is, goods taxed at 14% VAT) as well as zero-rated goods (that is, goods taxed at 0%) from the same place of business; o make taxable supplies (excluding VAT) of less than R1 million in any 12 month period; and o not have adequate point of sale equipment, that is, an electronic scanning system; or a touch screen register; or a product-specific cash register which is able to separately record zero-rated and standard-rated sales.

If you meet all these requirements, you may apply by completing a form (VAT SRVP1 Application for registration in terms of the Small Retailers VAT Package) and delivering it to the nearest SARS office or mail box. If your application is approved, you will receive written notification on a form SRVP2, a set of pre-printed record books and a detailed guide that explains all aspects of the Package.

Important points to take note of: If you have been accepted into the Small Retailers VAT Package and then decide, at some time in the future, to return to the normal VAT scheme you may apply to do so. Your reasons and circumstances will be taken into account when SARS assesses your application. Retailers who are not currently registered for VAT are encouraged to come forward and register voluntarily. SARS Voluntary Disclosure Dispensation allows for the conditional waiving of penalties or additional tax provided that the taxpayer approaches SARS voluntarily before an investigation of his or her affairs has commenced. The industry mark-up percentage of 40% used in the Small Retailers VAT Package is an average rate used to simplify the calculation of VAT. It should NOT be interpreted as the mark-up you should actually charge your customers on zero-rated goods.

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How does the Small Retailers VAT Package work? The Small Retailers VAT Package allows you to determine your output tax liability by applying the following method: Step 1 Calculate your daily gross takings inclusive of VAT over a period of 2 months. Step 2 Calculate the value of your zero-rated sales by adding the value of the Industry Mark-up Percentage to total zero-rated purchases that you used to make zero-rated supplies. Step 3 Calculate your standard-rated sales by deducting the zerorated sales (from step 2) from your daily gross takings. Step 4 Apply the 14% tax fraction to the total standard-rated sales determined in step 3. Step 5 Account for the output tax in your VAT201 return. Example Corner Caf was registered under the Small Retailers VAT Package. Corner Caf recorded the following transactions for the period 1 April 2008 to 31 May 2008: Cash in till at end of day Cheques and cash banked Cash taken for purchases Daily float Zero-rated stock purchases Standard-rated purchases R60 000 R25 000 R 5 000 R 250 R30 000 R34 200

The calculation of Corner Cafs Daily Gross Takings (DGT) for the period 1 April 2008 to 31 May 2008: Cash in the till at end of day Add: Cash/Cheques banked Add: Cash taken for purchases Less: Daily float TOTAL Daily Gross Takings R60 000 R25 000 R 5 000 -R 250 R89 750 103

The calculation of Corner Cafs zero-rated sales for the period 1 April 2008 to 31 May 2008:

Zero-rated register ) Less:

purchases

(from

the used

purchases to make

R30 000 NIL R30 000 R12 000

Zero-rated

purchases

standard-rated supplies Total zero-rated purchases used exclusively to make zero-rated supplies Add: The 40% industry mark-up percentage to the zero-rated purchases to obtain the total rand mark-up on zero-rated sales Total zero-rated sales (Total rand mark-up on zero-rated sales + total zero-rated purchases) The calculation of Corner Cafs standard-rated sales for 1 April 2008 to 31 May 2008: Daily gross takings Less: Zero-rated sales Total standard-rated sales R89 750 R42 000 R47 750 R42 000

The calculation of Corner Cafs VAT liability for the period 1 April 2008 to 31 May 2008: Standard-rated sales Standard-rated purchases Output tax (R47 750 x 14/114) Less: Input tax (R34 200 x 14/114) Tax payable R47 750 R34 200 R 5 864,04 R 4 200,00 R 1 664,04

4 4.1

CUSTOMS Introduction SA is a signatory to the Southern African Customs Union (SACU) agreement together with Botswana, Lesotho, Namibia and Swaziland. The five member countries of SACU apply the similar customs and excise legislation and the 104

same rates of customs and excise duties on imported and locally manufactured goods. The uniform application of tariffs and the harmonisation of procedures simplify trade within the SACU common customs area in that for customs purposes there is free movement of goods. However, all other national restrictive measures such as import and export control, sanitary and phytosanitary requirements and domestic taxes apply to goods moved between member states. A free trade agreement providing for preferential rates of customs duties is applied between SACU and other member states of the Southern African Development Community (SADC). SA has also entered into a free trade agreement with the European Union. A number of non-reciprocal preferential arrangements are applied to products exported from the region to developed countries. SACU as a trading bloc has further embarked on a number of negotiations in preferential agreements with other countries and trading blocs. More information in this regard can be obtained on the SARS website. SA has entered into agreements on mutual administrative assistance with various other countries. These agreements cover all aspects of assistance in the prevention and combating of customs fraud, including the exchange of information, technical assistance, surveillance, investigations and visits by officials. Bilateral agreements are in place with Algeria, France, Netherlands, the United Kingdom and the United States of America. Agreements have also been ratified in SA with Czech Republic, Mozambique and Zambia. Other agreements on trade related matters have been negotiated with Angola, Brazil, Democratic Republic of Congo, Iran, Israel, Malawi, Nigeria, Norway, Tanzania, Turkey, Uganda and Zimbabwe. In addition, agreements on mutual administrative assistance have been included in the free trade agreements with the European Commission (Protocol II) and in the SADC Protocol on Trade (Annex II). The duties levied on imported goods can be separated mainly into customs duties, which include additional customs duties (ad valorem), on certain luxury or non-essential items and anti-dumping and countervailing measures. In addition, VAT is also collected on goods imported and cleared for home consumption as well as a number of levies imposed on specific products. 105

It must be noted that SARS does not determine policy on what may and may not be imported free of duty, nor does SARS determine the rates of duties applicable as per the Harmonised Tariff. This policy is set by the International Trade Administration Commission (ITAC).

4.2

The Southern African Customs Union (SACU) The Southern African Customs Union came into existence on 11 December 1969 with the signature of the Customs Union Agreement between SA, Botswana, Lesotho, Namibia and Swaziland. It entered into force on the 1st of March 1970, thereby replacing the Customs Union Agreement of 1910. A more comprehensive agreement was agreed to in 2002 which was implemented on 1 July 2004. The new agreement provides for the establishment of the SACU Secretariat in Windhoek, Namibia and a number of committees responsible for the effective running of SACU activities. SACU is the oldest Customs Union in the world. The Council of Ministers, comprising the Ministers of Trade of the BLNS countries is responsible for the agreement and meets regularly to take decisions and discuss matters related to the agreement. In addition the agreement provides for the establishment of a Customs Union Commission, the Secretariat, the Tariff Board, Technical Liaison Committees and an ad hoc Tribunal. Technical liaison committees provided for are on Agriculture, Customs, Trade and industry and Transport. The committees meet on a quarterly basis. Its aim is to maintain the free interchange of goods between member countries. It provides for a common external tariff and a common excise tariff to this common customs area. All customs, excise and additional duties collected in the common customs area are paid into a Common Revenue Pool which is managed by SA for a transitional period. The revenue is shared among members according to a revenue-sharing formula as described in the agreement which is based on a Customs Component calculated on the basis of intra-SACU trade, an Excise Component which is calculated on the basis of its GDP as a percentage of the total SACU CDP and a Developmental Component which is set at 15% of the Excise Component.

106

4.3

Free trade agreements and preferential arrangements with other countries A number of agreements have been concluded or are in the process of being negotiated with other countries and trading blocs, which provides for preferential market access into SA as well as for South African products into other markets. These are:

4.3.1 Bi-lateral Agreements (Non-reciprocal) Trade Agreement between the Governments of SA and Southern Rhodesia (Zimbabwe); and Trade Agreement between the Government of SA and the Government of the Republic of Malawi, providing for preferential access of specific products subject to specific origin requirements and quota permits.

4.3.2 Preferential dispensation for goods entering SA (Non-reciprocal) Goods produced or manufactured in the Peoples Republic of Mozambique (Rebate Item 412.25), providing for free or reduced duties subject specific origin requirements.

4.3.3 Free or Preferential Trade Agreements (FTAs or PTAs) (Reciprocal) SACU The Southern African Customs Union consists of SA, Botswana, Lesotho, Namibia and Swaziland. Its aim is to maintain the free interchange of goods between member countries. It provides for a common external tariff and a common excise tariff to this common customs area. TDCA The Trade, Development and Cooperation Agreement between the European Community and its Member States on the one part, and SA on the other part, which was implemented on 1 January 2000. SADC Treaty of the Southern African Development Community, which was implemented on 1 September 2000. A number of such agreements are in the process of being negotiated or being finalised. Notably will be the agreements with the European Free Trade Association (EFTA). Other agreements being negotiated are those with the United States of America, India, China and the Common Market of the Southern Cone (MERCOSUR). 107

4.3.4

Generalised System of Preferences (GSPs) (Non- reciprocal) AGOA Preferential tariff treatment of textile and apparel articles imported directly into the territory of the United States of America from SA as contemplated in the African Growth and Opportunity Act EU Non-reciprocal preferential tariff treatment under the Generalised System of Preference granted to developing countries by the European Community Norway Non-reciprocal preferential tariff treatment under the Generalised System of Preference granted to developing countries by the Kingdom of Norway Switzerland Non-reciprocal preferential tariff treatment under the Generalised System of Preference granted to developing countries by the Swiss Confederation Russia Non-reciprocal preferential tariff treatment under the Generalised System of Preference granted to developing countries by the Russian Federation Turkey Non-reciprocal preferential tariff treatment under the Generalised System of Preference granted to developing countries by the Republic of Turkey

4.4 4.4.1

Duties Customs duty Customs duty is levied on imported goods and is usually calculated as a percentage on the value of the goods (refer to the relevant Schedules to the Customs and Excise Act, 1964). However, goods such as certain meat and primary plastic products, certain textile products and certain firearms attract rates of duty that are calculated either as a percentage of the value of the goods, or as cents per unit, kilogram or metre, etc. Additional ad valorem customs duties are levied on a wide range of luxury or non-essential items such as perfumes, firearms, arcade games, etc.

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4.4.2

Specific excise duties and specific customs duties on imported goods of the same class or kind Specific excise duty, based on the specific quantity or volume of the product, is levied on certain locally manufactured products and is calculated on the wholesale selling price which is paid on products such as alcoholic beverages, tobacco products, fuel, and certain products of the chemical and allied industries. Specific customs duties on imported products of the same class or kind is a contra duty which is payable on such imported products. These duties are levied for fiscal reason. As liability for excise duty is based on consumption within the local country borders, relief from excise duty is granted in the form of a full rebate where excisable products are exported to countries beyond the borders of the Southern African Customs Union (SACU). Because it is not the intention of the legislator to unnecessarily tax the manufacture of local products, relief (in the form of full or partial rebates) is also granted in respect of the industrial use of these excisable products, for example, spirits used in the manufacture of medicines, paints, adhesives, etc. and petroleum products used in farming, fishing and forestry. During the 2002/2003 financial year, a Duty at Source (DAS) assessment system was implemented in the SACU. This system provides for the assessing of specific excise duties and accounting for such excisable goods (excluding wine) at source, that is, as near as possible to the manufacturing point. This reduces the cost of compliance and of collection whilst maintaining cash neutrality for both SARS and the Industry.

4.4.3 Ad valorem excise duties and ad valorem customs duties on imported goods of the same class or kind Ad valorem excise duty is levied on certain luxury or non-essential items calculated on the wholesale selling price which include products such as perfumes, cosmetics, apparel of leather and fur, cell phones, televisions, motor vehicles and motor cycles. Ad valorem customs duties on imported products of the same class or kind is a contra duty which is payable on such imported products. These duties are levied for fiscal reasons. 109

Manufactures and owners of these products should approach their local Customs and Excise Office for licensing purposes. Ad Valorem Excise Duties and Ad Valorem Customs Duties are levied on those items specified in Schedule No. 1 Part 2B of the Customs and Excise Act. Part 2B is divided into Excise and Customs parts. Thus, a local manufacturer of perfumes, for example, would pay the Schedule 1 Part 2B rate of Ad Valorem Excise Duty, whilst an importer of perfumes would have to pay the Schedule 1 Part 1 rate of Customs Duty (if applicable) as well as the Schedule 1 Part 2B rate of Ad Valorem Customs Duty.

4.4.4 Anti-dumping and countervailing duties on imported goods Anti-dumping and countervailing duties are levied on goods considered to be dumped in SA or on subsidised imported goods respectively. These goods are the subject of trade and industry investigations into pricing and export incentives in the country of origin and the rate imposed will depend on the result of the investigations. The above duties are either levied on an ad valorem basis (percentage of the value of the goods) or as a specific duty (percentage per unit, kilogram, litre, etc). The level and type of duty imposed on a product is subject to the following main criteria

4.5

the value of the goods (customs value); the volume or quantity of the goods; and the tariff classification of the goods (tariff heading)

VAT Importation of goods VAT is, in terms of section 7(1)(b) of the VAT Act, levied at the rate of 14% on the importation of goods into SA from export countries, including Botswana, Lesotho, Namibia and Swaziland. However, the importation of certain goods into SA is, in terms of section 13(3) read with Schedule 1 to the VAT Act, exempt from VAT on importation. The value to be placed on the importation of goods into SA is, in terms of section 13(2)(a) of the VAT Act, deemed to be the value of goods for customs duty purposes, plus any duty levied in terms of the Customs and Excise Act in 110

respect of the importation of such goods, plus 10 percent of the said value. Section 13(2)(b) of the VAT Act provides that the value is not increased by the factor of 10 percent where the goods have their origin in Botswana, Lesotho, Namibia or Swaziland. 4.6 Customs value Customs values are established in terms of the General Agreement on Tariffs and Trade (GATT) valuation code, relating to the six valuation methods. The majority of goods are valued using method 1, which is the actual price paid or payable by the buyer of the goods. The Free on Board (FOB) price forms the basis for the calculation of duties, levies and taxes, allowing for certain deductions (for example, interest charged on extended payment terms) and additions (for example, certain royalties) to be effected. Customs pay particular attention to the relationship between the buyer and seller, payments outside of the normal transactions, for example, royalties and licence fees and restrictions that have been placed on the buyer. These aspects can result in the price paid for the goods being increased for the purpose of determining a customs value and thus directly affecting the customs duty payable.

4.7

Customs declarations

Declaration made to Customs on a bill of entry at the time of importation and exportation must be accurate and correct. The acceptance of such declarations must not be construed as acceptance of the information provided as being correct. Declarations and related documents must normally be retained for a period which may vary between two and five years depending on the requirements in certain specific circumstances. Where errors are detected by Customs or false declarations are made, whether duties were payable or not, the Act provides for penalties of up to three times the value of the goods, in addition to forfeiture of the goods. In instances of fraud, offenders may be prosecuted. Importers and exporters of goods for commercial purposes to and from SA must register with SARS for that purpose. Importers and exporters of non-commercial goods are, however, excluded from registration,
111

provided that this is limited to three importations per year and each consignment is less than R20 000.

4.8

Goods imported for inward or outward processing Rebate provisions are provided for the suspension of customs duties on goods imported for inward processing (Industrial rebates) and outward processing (temporary admission for purposes of manufacture for export) subject to certain conditions. VAT is suspended as well for goods temporary admitted for outward processing.

4.9

General rebates of customs duties Rebates of customs duties are provided for the importations of goods by handicapped persons, diplomats, as passengers baggage, personal and household goods on change of residence and in certain specific cases. (General rebates).

4.10 Persons entering SA Persons may enter SA at certain appointed places of entry. All goods brought into SA must be declared to a Customs official at the port of entry. Customs duties and VAT must be paid on all goods imported into SA. Travellers are, however, granted a duty free allowance and an exemption from VAT on new or used goods of a non-commercial nature brought with them into SA as accompanied or unaccompanied baggage up to a value of R3 000. In addition, allowances are made for a full rebate of customs duty and VAT on consumable goods such as perfumes, toilet water, cigarettes, cigars, pipe tobacco, wine and liquor are granted, subjective to quantitive restrictions. Over and above the duty free allowance of R3 000 and the allowance for consumables, travellers may elect to pay Customs duty at a flat rate of 20% on any additional goods which they have acquired abroad of a total value not exceeding R12 000. By electing to use the 20% flat-rate, the passenger is exempt from the payment of VAT on such goods. However, to qualify for the 20% flat-rate assessment the combined value of all the consumables, the R3 000 duty free allowance and any additional goods imported may not exceed R15 000. 112

Where the combined value of the above mentioned goods exceeds R15 000, the additional goods imported no longer qualify for the flat-rate assessment and duty at the applicable rate and VAT becomes payable.

4.10.1 Goods imported without the payment of customs duty and which are exempt from VAT (a) Persons not residents of SA Personal effects and sporting and recreational equipment, new or used, imported either as accompanied or unaccompanied passengers baggage, for own use during the stay in SA. (b) Residents of SA Personal effects and sporting and recreational equipment, new or used, exported by residents of SA for their own use while abroad and subsequently re-imported either as accompanied or unaccompanied passengers baggage. (c) Limits in respect of certain goods Certain consumable goods may be imported as accompanied passengers baggage without the payment of customs duties and VAT by residents or non-residents, but not exceeding the following limits: Wine Spirits and beverages Cigarettes Cigars Cigarette or pipe tobacco Perfume Eau de toilette other 2 litres per person alcoholic 1 litre per person 200 per person 20 per person 250g per person 50ml per person 250ml per person

Consumables imported in excess of the quantities stipulated above will be assessed for customs duty in terms of the rates applicable and VAT will be payable thereon.

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In addition to the above-mentioned goods, new or used goods up to the value of R3 000 per person (included in accompanied passengers baggage), may be imported without the payment of duty and VAT. The duty free allowance in respect of such goods (new or used) imported for personal use remains applicable for any such goods up to a value of R3 000, notwithstanding the fact that the total of such goods may exceed that amount. Note: Visitors may be required to pay a cash-deposit to cover the duty and the VAT on expensive articles, for example video cameras temporarily imported to SA. The deposit on the goods is refunded on departure from SA. Allowances may not be pooled or transferred to other persons. (d) Children under 18 years of age Children under 18 may also claim duty-free allowances and exemption from VAT (referred to above) on goods imported by them with the exception of alcohol and tobacco products, whether or not they are accompanied by their parents or guardians and provided that it is for their personal use. Parents or guardians may make Customs declarations on behalf of minors. (e) Flat-rate assessment In addition to the duty free allowance, a passenger may elect to pay customs duty at a flat-rate of 20% on goods which have been acquired abroad or in any duty-free shop, including such goods bought duty-free on an aircraft/ship and which have been brought with the passenger as accompanied baggage. These additional goods, new or used, of a total value not exceeding R12 000 per person fall within this concession. Over and above the allowance for consumables and the duty free allowance of R3 000, passengers may elect to pay Customs duty at a flat rate of 20% on any additional goods which they have acquired 114

abroad of a total value not exceeding R12 000. However, to qualify for the 20% flat-rate assessment the combined value of all the consumables, the R3 000 duty free allowance and any additional goods imported may not exceed R15 000. Where the combined value of the above mentioned goods exceeds R15 000, the additional goods imported no longer qualify for the flat-rate assessment and duty at the applicable rate and VAT becomes payable. (f) Crew members A member of the crew of a ship or aircraft (including the master or pilot) is entitled to a rebate of duty and exemption from VAT if such member returns to SA permanently and provided the total value of new or used goods declared for personal use does not exceed R500. In the case of additional goods, new or used, the rebate of duty and exemption from VAT applies provided the total value of such goods declared for personal use does not exceed R2 000. Note: The allowances in (c), (d) and (e) may only be claimed at the time of entry into SA, thus at the place where those persons disembark or enter the country, and under the conditions prescribed. The allowances will also only be allowed once per person during a period of 30 days and shall not apply to goods imported by persons returning after an absence of less than 48 hours.

4.10.2 Customs clearance procedures for travellers Travellers may select to enter the Red or the Green Channel upon arrival in SA. By selecting the Red Channel the traveller indicates that he/she has goods to declare in access of the duty free allowances on which customs duties must be paid. The Customs officer in the Red Channel will ascertain the value of the goods declared; duties and VAT payable by the traveller; and 115

if it falls within the passenger's duty-free allowances.

By selecting the Green Channel, a traveller indicates that he/she has no goods to declare, in other words he/she has no prohibited or restricted goods; or goods in excess of his/her duty-free allowances.

Random searches of travellers baggage in the Green Channel are conducted. 4.11 Implementation of a Single Administrative Document (SAD) During 2003, Namibia, Botswana and SA entered into an Memorandum of Understanding (MOU), of which the key objective was the fostering of trade facilitation with a pivotal component being the rationalisation of procedures and forms by the three Customs Administration. As a result thereof, the Trans Kalahari Corridor (TKC) pilot programme was initiated during August 2003 and gradually extended to different border posts. In August 2004 the Single Administrative Document (SAD) was permanently introduced as the document to be used for the clearance of goods removed through the border posts. International best practice, culminating in the rationalisation of customs information requirements in the World Customs Organisations (WCO) Data Model, is the key driving force for a single clearance document. The adoption of the SAD is moreover in line with SARS Service Charter, to make customs clearance easier and more convenient for importers, exporters and crossborder traders. The full national implementation of the SAD document was effect from 1 October 2006 (Government Gazette No. 29257, Notice No. R961 dated 29 September 2006). The implementation has the effect that the SAD document is being used nationally instead of the forms DA 500, DA 501, DA 504, DA 510, DA 514, DA 550, DA 551, DA 554, DA 600, DA 601, DA 604, DA 610, DA 611, DA 614 and the CCA1 form. 116

4.12 Goods accepted at appointed places of entry Goods imported into SA are accepted at certain appointed places of entry, which include Customs appointed airports; Customs appointed border posts; Customs appointed harbours; and the postal service.

4.13 Cargo entering SA When cargo is landed in SA, a cargo manifest in respect of those goods must be produced to Customs. These manifests reflect all the goods imported. All the goods must be accounted for to the satisfaction of Customs by means of bills of entry. If importers or owners of imported goods fail to enter their cargo for customs purposes the goods may be detained and removed to the State warehouse.

4.14 State warehouses The State provides State warehouses for the safekeeping of goods. The main purpose of such warehouses is to protect duty and VAT which may be due thereon. The reason for such safekeeping may include goods not entered for customs purposes, abandoned goods, seized goods or goods detained provisionally for specific reasons subject to compliance with requirements for import or export. When the importer or owner of goods has complied with all customs or other requirements, release thereof may be granted upon payment of the applicable state warehouse rent. Unclaimed goods may be sold on public auction after a prescribed period from the date on which the goods were taken up in the State warehouse and the proceeds are applied in discharge of any duties, VAT or other expenses in respect of those goods.

4.15 Importation of household effects by immigrants/returning residents Bona fide household effects may be imported, free of duty and exempt from the VAT normally levied on importation, provided that the importer changes his/her residence to SA on a permanent/temporary basis. Importers such as contract workers and students may also import their bona fide household effects under rebate of duty and exempt from VAT (a deposit may be called for to cover the VAT on importation either in part or in full, which is refundable when such goods are exported). The requirement would, however, be that they re-export 117

their household effects at conclusion of the work contract or studies, or they may dispose of it locally, provided they have not sold, lent, hired or disposed of it in any manner whatsoever within a period of six months since importation. Importers taking up temporary residence in the Republic on a continual basis, for example, people with holiday homes, do not qualify for this rebate.

4.16 Motor vehicles Natural persons on change of their residence on a permanent basis to SA may import one motor vehicle into SA, free of duty and exempt from VAT. Here they would be required to qualify as a permanent resident sanctioned by the Department of Home Affairs. South Africans working or studying abroad does not qualify for this rebate item.

4.17 Motor vehicles imported on a temporary basis Motor vehicles utilised in SA by tourists may be imported under rebate of duty and exempt from VAT for a period of three months and this may be extended to six months (a deposit may be called for to cover the VAT on importation either in part or in full, which is refundable when such goods are exported). After a period of six months the motor vehicles must be re-exported.

EXCISE DUTIES AND LEVIES Excise duty, fuel levy and environmental levy are forms of indirect taxation used by government to primarily contribute to the fiscus, but also in certain instances to influence consumer behaviour. The total collection for these duties and levies currently amounts to approximately 10% of all SARS revenue. Liability for the payment of excise duty is based on consumption of excisable products within the local country borders and the Southern African Customs Union (SACU). Relief from this liability to pay excise duty, in the form of a full rebate, is therefore granted when excisable products are exported to countries beyond the borders of the SACU. Because it is not the intention of the legislator to unnecessarily tax the manufacture of local products, relief (in the form of full or partial rebates) is also granted in respect of use of excisable products in the manufacture of other nonexcisable products and for the industrial use of these excisable products, for example, spirits used in the manufacture of medicines, paints, adhesives, etc. and petroleum products used for farming, fishing and forestry purposes. 118

During the 2002/2003 financial year, a Duty at Source (DAS) assessment and accounting system for excisable products was implemented in the SACU. This system provides for the assessing of specific excise duties and accounting for excisable products (excluding wine) at source; that is, as near as possible to the manufacturing point. This system reduces the cost of compliance for clients and the cost of collection and risk to revenue for SARS whilst maintaining cash neutrality (in relation to the previous assessment system) for both Industry and SARS.

5.1

Specific Excise duties Specific Excise duties are levied on certain locally manufactured, non-essential products consumed locally and a counter-veiling Customs duty, equal to the amount of the specific excise duty, is levied on their imported counterparts. The duty is assessed on the specific quantity or volume of excisable products consumed locally and such products include tobacco products, liquor products, petroleum products and hydro-carbons. The following are some of the excisable products and their respective specific duty rates which are applicable with effect from 20 February 2008:

Alcoholic Beverages Malt beer Traditional African Beer Spirits and spirituous beverages Alcohol Sparkling wine Fortified wine Unfortified wine Traditional African Beer Powder

Duty R42.38 /l of absolute alcohol 7.82 c/l R67.72 /l of absolute alcohol Duty R5.63 /l R3.40 /l R1.84 /l 34.7 c/kg

Tobacco Cigarettes Pipe tobacco Cigarette tobacco Cigars

Duty R3.41 /10 cigarettes R92.15 /kg net R173.49 /kg R1 726.92 /kg net 119

5.2

Ad Valorem Excise duties Ad Valorem Excise duties are levied on certain other locally manufactured nonessential/luxury products with a corresponding Ad Valorem Customs duty (at the same rate of duty) on imported goods of the same class or kind. The duty is assessed on the value of such excisable products consumed locally and such products include, amongst others, motor vehicles, cell phones, gaming and vending machines, cosmetics and television receivers. The following are some of the excisable products and their respective ad valorem duty rates with effect from 1 April 2008: Ad Valorem Products Products Perfumes and toilet waters Beauty or make-up preparations and preparations for care of the skin Fireworks Apparel or clothing accessories of furskin or artificial furskin Air conditioning machines for buildings Refrigerators/Freezers Line telephones with cordless handsets, loudspeakers and amplifiers, sound and video recording or reproducing apparatus and cellular telephones Cellular telephones, still image video cameras, other video camera recorders and digital cameras Domestic radio-broadcast receivers, reception apparatus for television, video monitors and video projectors Motor vehicles (sliding scale) Motorcycles (200 800cc) Motorcycles exceeding 800cc Water scooters Firearms Golf balls Note: The list is not exhaustive. Duty 7% 5% 7% 7% 7% 7%

7% 7% 7% Max 20% 5% 7% 7% 7% 7%

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Manufacturers and holders of both these specific excise duty and ad valorem excise duty products, on which duty has not yet been assessed or paid, must license warehouses with the local Controller of Customs and Excise prior to the start of such manufacturing or holding.

5.3

General Fuel Levy and Road Accident Fund Levy In SACU, the General Fuel levy and the Road Accident Fund levy are charged only in SA and this levy is charged over and above the specific excise duty charged on certain fuel products. The following are some of the fuel levy products and their respective levy rates as published by the Minister of Finance on 2 April 2008:

General Fuel Levy products Petrol ( leaded and unleaded) Aviation kerosene Illuminating kerosene (marked) Illuminating kerosene (unmarked) Distillate fuel (diesel)

Rate of Fuel Levy 127 c/l free free 111 c/l 111 c/l

Road Accident Fund levy on petrol/diesel as from 46.5 c/l 2 April 2008 5.4 Environmental Levy Since 1 June 2004 an environmental levy is charged on certain plastic carrier bags and flat bags (bags generally regarded as grocery bags) at a rate of 3 cents per bag. Plastic bags used for immediate wrapping/packaging, refuse bags and refuse bin liners are excluded from paying this levy. Apart from the payment of this specific Environmental Levy per quarterly excise account, VAT is also levied on these bags, calculated on a value which includes the amount of the levy. Manufacturers of such bags must licence their premises as manufacturing warehouses with the local Controller of Customs and Excise and submit quarterly excise accounts to such Controller.

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6.

TRANSFER DUTY Transfer duty is levied on the consideration payable for the acquisition of fixed property. If, for some reason, no consideration is payable or consideration is not market related, the duty is levied on the fair market value of the property. Provision has been made to counter the avoidance of transfer duty by placing residential property in companies, close corporations and discretionary trusts and selling the shares, members interest and, arguably, contingent rights instead of the property. The term property as defined in section 1 of the Transfer Duty Act, No. 40 of 1949 was amended to include shares, members interest and contingent rights in certain circumstances and to bring the transfer of these assets within the charging section. All transactions relating to a taxable supply of goods and subject to VAT are exempt from transfer duty. For more information see the Transfer Duty Handbook on the SARS website.

Transfer duty rates From 1/03/2006 to date:

Individuals Consideration On the first R500 000 of the consideration Rate 0%

On the amount that exceeds R500 000 but 5% not R1 million On the amount that exceeds R1 million R25 000 plus 8% on the value above R1million

Persons other than individuals A person other than a natural person, for example, a company, close corporation or trust 8% of the consideration.

7.

ESTATE DUTY Where the deceased was ordinarily resident in SA his/her estate will, for estate duty purposes, consist of all property wherever situated, including deemed property (for example, life insurance policies and payments from pension 122

funds). However, property situated outside SA will be excluded from his/her estate if such property was acquired by him/her before he/she became ordinarily resident in SA for the first time, or after he/she became ordinarily resident in SA and acquired such property by way of donation/inheritance from a person which was not ordinarily resident in SA at the date of such donation/inheritance. The exclusion also applies to property situated outside SA, acquired out of profits/proceeds of any such property acquired in the above circumstances. The estate of a person who is not a resident of SA is only subject to estate duty to the extent that it consists of certain property of the deceased in SA. The term property is defined in section 3(2) of the Estate Duty Act, No. 45 of 1955 and includes deemed property referred to in the paragraph above. The Estate Duty Act unlike the IT Act does not have a definition of the word resident and only refers to persons who are ordinarily resident or not ordinarily resident. It therefore, follows that any natural person who is not ordinarily resident in SA, but who became a resident of SA, in terms of the physical presence test for income tax purposes, is still regarded as not a resident of SA for estate duty purposes, due to the fact that such person is not ordinarily resident in SA. The duty is calculated on the dutiable amount of the estate. Certain admissible deductions are made from the total value of the estate. Two important deductions are the value of property in the estate that accrues to the surviving spouse of the deceased and all debts due by the deceased. The net value of the estate is reduced by a R3,5 million general deduction to arrive at the dutiable amount of the estate.

Estate duty rate The rate is 20% of the dutiable amount.

Example of estate duty calculation Net value of estate Less: General deduction Dutiable amount Duty payable on R100 000 at 20% Interest at 6% per annum is charged on unpaid duty. 123 R3 600 000 R3 500 000 R 100 000 R20 000

The South African Government has agreements to avoid double death duties with Botswana, Lesotho, Swaziland, Zimbabwe, Sweden (terminated with effect from 1 January 2005), the United Kingdom1978, and the United States of America. These agreements are available on the SARS website.

8.

STAMP DUTY Stamp duty is levied on instruments such as leases of immovable property and unlisted marketable securities at different rates.

Leases of immovable property The duty is calculated at 0,5% of the quantifiable amount of a lease. Where the rental is not quantifiable (that is, turnover rental), duty will be payable when the amount becomes quantifiable. Notes: (1) (2) The duty payable not to exceed 8 per cent of the value applicable for transfer duty purposes. Lease agreements executed on or after 1 June 2007 Lease agreements for a duration of five years or less are exempt.

9.

UNCERTIFICATED SECURITIES TAX (UST) Uncertificated securities tax at the rate of 0,25% is payable in respect of a change in beneficial ownership in any securities listed on the JSE, which are not interest-bearing. Note: UST and stamp duties on marketable securities (unlisted shares) have been replaced with a Securities Transfer Tax, which is payable at a rate of 0,25% of the purchase price on the transfer of securities with effect from 1 July 2008.

10.

SKILLS DEVELOPMENT LEVY (SDL) This is a compulsory levy scheme for the funding of education and training. SARS administers the collection of the levy. The levy, at the rate of 1%, is payable by employers who have an annual payroll in excess of R500 000. The levy is deductible for income tax purposes and employers providing training to employees receive grants in terms of this scheme. 124

11.

UNEMPLOYMENT INSURANCE CONTRIBUTIONS The Unemployment Insurance Fund insures employees against the loss of earnings due to termination of employment, illness and maternity leave. A monthly contribution is collected from the employer, which consists of a contribution made by the employee equal to 1% of the remuneration paid or payable by the employer to the employee during any month; and a contribution made by the employer equal to 1% of the remuneration paid or payable by the employer to that employee during any month. An employer who is registered for Employees Tax or the Skills Development Levy is automatically registered for UI contributions with SARS. (The forms used are the same forms that are used for SDL and PAYE purposes). An employer that is not liable for the payment of Employees Tax or SDL must register for UI purposes with the Unemployment Insurance Commissioner at the Department of Labour. The maximum earnings for UIF contributions are R149 736 per annum, R12 478 per month or R2 879.53 per week. Employees who earn more annually, monthly or weekly than the maximum amounts indicated above are also liable to contribute to the UIF, but contributions payable are only calculated on R149 736 of their annual remuneration, or on R12 478 of their monthly remuneration, or on R2 879.53 of their weekly remuneration. Where an amount of an employees contribution which has been deducted by an employer which is a company (other than a listed company) has not been paid over to the Commissioner or the Unemployment Insurance Commissioner, the representative employer and every director and shareholder of that company who controls or is regularly involved in the management of the companys overall financial affairs will personally be liable for the payment of that amount to the Commissioner or the Unemployment Insurance Commissioner and for any penalty which may be imposed in respect of that payment.

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Further information in this regard is available on the SARS website. The Department of Labours website, www.uif.gov.za also has useful information in this regard.

12

AIR PASSENGER DEPARTURE TAX The tax is equal to R60 per passenger departing to Botswana, Lesotho, Namibia, and Swaziland; and ,. R120 per passenger departing to other international destinations.

13

SOUTH

AFRICAN

RESERVE

BANK

EXCHANGE

CONTROL

REGULATIONS Exchange control regulations restricting the in and out flow of capital in SA still exist. For example, investments into SA must be reported and prior approval may be required if loan capital is invested in SA. Residents of SA wishing to remit/invest/lend amounts abroad are as a general rule subject to exchange control restrictions and will need to approach their local commercial banks in this regard. Individuals who are over 18 years and in good standing with their tax affairs may invest a total of R2 million outside SA. However, individuals are also able to invest, without restriction, in foreign companies listed on South African bond and security exchanges. In addition individuals will be allowed a single discretionary allowance of R500 000 per year for purposes of travel, donations, gifts and maintenance. Companies may use unlimited SA funds for new approved foreign direct investments (strictly true investments in factories or businesses and not for portfolio investments). Companies will also be allowed to retain foreign dividends offshore, and dividends repatriated to SA after 26 October 2004 may be transferred offshore again at any time for any purpose. Application to the South African Reserve Banks Exchange Control Department is still required for monitoring purposes and for approval in terms of existing foreign direct investment criteria, including demonstrated benefit to SA. The 126

South African Reserve Bank, however, reserves the right to stagger capital outflows relating to very large foreign investments so as to manage any potential impact on the foreign exchange market. Further information is available on the Reserve Bank website,at

www.reservebank.co.za.

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Annexure A

EXAMPLES OF HOW INCOME TAX IS CALCULATED

Example 1 X is under 65 years of age Salary income (remuneration) Pension fund contributions Medical expenses Medical scheme contributions (1 month) Retirement annuity fund contributions SITE and PAYE R146 700 R 11 002 R 550 R 570 R 1 750 R 17 121

Determine the taxable income of X and the income tax payable to SARS/refundable by SARS. Solution Determination of taxable income: Total income (remuneration) Less: Pension fund contributions Less: Retirement annuity fund contributions Less: Medical scheme contributions () Less: Medical expenses (2) Taxable income ()
2

R 11 002 1 750

R 146 700 12 752 133 948 570 Nil R133 378

As the medical scheme contributions do not exceed the applicable capped amount of R570, the full contribution of R570 is allowed.

( ) As the medical expenses of R550 is less than 7.5% of the taxable income 7.5% x [R133 948 R570] = R10 003 no medical expenses are allowed as a deduction. Determination of income tax payable to SARS/refundable by SARS: Tax on R122 000 Tax on R 11 378 x 25% Less: Primary rebate Less: SITE and PAYE Income tax refundable by SARS R21 960-00 R 2 844-50 R24 804-50 R 8 280-00 R16 524-50 R17 121-00 R 596-50

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Example 2 Married in community of property (see 2.4.5). Husband is 66 years of age and his wife is 59 years of age Income Remuneration Taxable income from business R60 000() Net rental income R 8 000() + R12 000(3) Gross interest R24 000(4) Deductions Medical expenses paid Pension fund contributions Retirement annuity fund contributions Husband R80 000 Wife -

R1 000 R6 500 R1 750

R3 810 R5 600

() The spouses carry on a trade jointly. According to the agreement the profitsharing ratio is 40:60 husband 40%, wife 60%. (2) Wife owns a property she inherited from her father. Her fathers will stipulate that the income of R8 000 derived from the property may not form part of her husband's estate. ( ) The rental income of R12 000 of the husband is part of the joint estate. (4) The total interest of R24 000 is part of the joint estate. Determine the taxable income of the husband and his wife and the income tax payable to SARS/refundable by SARS.
3

Solution Tax position - husband Determination of taxable income: Income Remuneration Taxable income from business (R60 000 x 40%)() Net rental income Nil(2) + (R12 000 x 50%)(3) Gross interest (R24 000 x 50%)(4) - R12 000 Less: Allowable deductions Pension fund contributions (7,5% x R80 000) Retirement annuity fund contributions Less: Medical expenses (own) over 65, no limit Taxable income R6 000 R1 750

R 80 000 R 24 000 R 6 000 R nil R110 000 R 7 750 R102 250 R 1 000 R101 250

() According to the agreement the profit-sharing ratio is 40:60 husband 40% and wife 60%. 129

(2) Her fathers will stipulate that the income derived from the property may not form part of her husband's estate, therefore no portion of the R8 000 is included in her husbands taxable income. ( ) The rental income of the joint estate is split equally between spouses due to the fact that they are married in community of property, therefore, rental income is split 50% husband and 50% wife. ( ) The total interest of R24 000 is part of the joint estate and is split equally between spouse due to the fact that they are married in community of property, therefore, interest of R24 000 is split 50% husband and 50% wife. Both spouses are each entitled to the exemption of interest income. Husband over 65 years of age, therefore R27 500 is exemption limit to R12 000. Determination of income tax payable to SARS/refundable by SARS: Tax on R101 250 at 18% Less: Primary rebate Additional rebate (age 65 years and older) Income tax payable to SARS Tax position - wife Determination of taxable income: Income Business income (R60 000 x 60%) () Net rental income R8 000(2) + (R12 000 x 50%)(3) Gross interest (R24 000 x 50%)(4) - R12 000 Less: Allowable deductions Retirement annuity fund contributions (15% x R50 000 = R7 500) limited to actual contributions R5 600 Medical expenses (own) 7.5% x R44 400 = R3 330. Therefore R3 810 - R3 330 = R480 Taxable income R18 225-00 R8 280 R5 040 (R13 320-00) R 4 905-00
4 3

R36 000 R14 000 R nil R50 000 R 5 600 R44 400 R 480

R43 920

() According to the agreement the profit-sharing ratio is 40:60 husband 40% and wife 60%. (2) Her fathers will stipulate that the income derived from the property may not form part of her husband's estate, therefore the full amount of R8 000 is included in her taxable income.

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(3) The rental income of the joint estate is split equally between spouses due to the fact that they are married in community of property, therefore, rental income is split 50% husband and 50% wife. ( ) The total interest of R24 000 is part of the joint estate and is split equally between spouse due to the fact that they are married in community of property, therefore, interest of R24 000 is split 50% husband and 50% wife. Both spouses are each entitled to the exemption of interest income. She is under 65 years of age, therefore R19 000 exemption limit to R12 000. Determination of income tax payable to SARS/refundable by SARS: Tax on R43 920 x 18% Less: Primary rebate Income tax payable to SARS Example 3 Widow, over 65 years of age. Medical expenses R3 800 Income Pension Interest Foreign dividends (no foreign tax paid) Gross income R48 500 R18 500 R 4 000 R71 000 R7 905-60 R8 280-00 R Nil
4

Determine the taxable income of the widow and the income tax payable to SARS/refundable by SARS.

Solution Determination of taxable income: Pension Foreign dividends Less: Exempt portion (maximum of R3 200) Interest Less: Exempt portion (R27 500 R3 200 applied to foreign dividends = R23 800 limited to R18 500) Less: Medical expenses Taxable income Determination of normal tax payable on R45 500: Tax on R45 500 x 18% Less: Primary rebate Additional rebate (65 years or older) Income tax payable to SARS R 8 190-00 R8 280-00 R5 040-00 R13 320-00 R Nil 131 R48 500 R 4 000 R 3 200 R18 500 R18 500 R 800

nill

R49 300 R 3 800 R45 500

Example 4 An employee receives cheap accommodation in the 17% category, as well as a company car with a purchase price of R80 000 (excluding VAT, interest and finance charges). The employees remuneration for the preceding year of assessment was R103 000. He pays: R200 per month towards the use of the motor vehicle; and R500 per month towards the use of the accommodation.

Calculate the values of the taxable benefits.

Solution The monthly values of the taxable benefits are calculated as follows:

Accommodation = [(R103 000 R46 000) x 17/100 x 1/12] R500 = R804-50 R500 = R307-50 per month

Company motor vehicle = (R80 000 x 2.5%) R200 = R2 000 R200 = R1 800 per month The taxable benefits of R307-50 and R1 800 must be added to the employees monthly remuneration in order to determine the amount on which employees tax is to be deducted.

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