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SOUTH AFRICAN REVENUE SERVICE

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Another helpful guide brought to you by theSouth African Revenue Service


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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) individuals for the 2008/09 year of assessment ending on 28 February 2009;

b) trusts for the 2008/09 year of assessment ending on 28 February 2009; and

c) 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
http://www.sars.gov.za/http://www.sars.gov.za/


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CONTENT

1 INTRODUCTION 8

1.1 Autonomous Body 8

1.2 SARS Act 8

1.3 Collection of taxes 8

1.4 Overview of Taxes 9

2 INCOME TAX 12

2.1 Introduction 12

2.1.1 Main source of Governments income 12

2.1.2 Registration as a taxpayer 12

2.1.3 Change of address 12

2.1.4 Year of assessment 12

2.1.5 Filling of tax returns 12

2.1.6 eFiling 13

2.1.7 Payments at Banks 13

2.1.8 Assessment 13

2.1.9 Calculation of taxable income 13

2.1.10 Calculation of final income tax liability 14

2.2 A resident of SA 15

2.2.1 Individuals 15

2.2.2 Companies and other entities 16

2.2.3 South African residents working outside SA 17

2.2.4 Agreements for the avoidance of double taxation (DTA) 18

2.2.5 Unilateral relief for foreign taxes paid 19

2.3 Not a resident of SA 19

2.3.1 A person who is not a resident of SA, who is temporarily working in SA 19

2.3.2 Employees working at foreign diplomatic or consular missions in SA 21

2.4 Individuals 222.4.1 Taxation of income from employment 22

2.4.2 Standard Income Tax on Employees (SITE) 22

2.4.3 Pay-As-You-Earn (PAYE) 23

2.4.4 Provisional tax 28

2.4.5 Income of spouses 30

2.4.6 Allowable deductions 32

2.4.7 Prohibited deductions 38

2.4.8 The taxation of taxable benefits 38

2.4.9 Pensions 45


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2.4.10 Annuities 46

2.4.11 Withholding tax on foreign entertainers and sportspersons 47

2.4.12 Withholding tax on payments to non-residents on the sale of their

immovable property in SA 47

2.5 Rental income 48

2.6 Investment income 48

2.7 Tax on royalties 50

2.8 Restraint of trade 50

2.9 Business income 51

2.10 Companies and businesses 51

2.10.1 Tax consequences of doing business in a company 51

2.10.2 Provisional tax 51

2.10.3 Controlled foreign companies 52

2.10.4 Small Business Corporations (SBCs) 55

2.10.5 Special allowances 57

2.10.6 Secondary Tax on Companies (STC) 72

2.10.7 Insurance companies 73

2.10.8 Mining companies 74

2.10.9 Shipping and aircraft 75

2.10.10 Farming 75

2.10.11 Deductions in respect of expenditure and losses incurred

prior to commencement of trade (pre-trade costs) 77

2.11 Donations tax (and PBOs) 77

2.12 Capital Gains Tax (CGT) 79

2.12.1 Introduction 79

2.12.2 Registration 79

2.12.3 Rates 79

2.12.4 Capital losses 802.12.5 Disposal 80

2.12.6 Exclusions 80

2.12.7 Base cost 81

2.12.8 Annual exclusion 83

2.12.9 Small businesses 84

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

resident of SA 84

2.12.11 CGT on disposal of foreign assets by residents 84

2.13 Ring-fencing of assessed losses 86


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2.14 Dispute Resolution 87

2.14.1 Objections 87

2.14.2 Appeals 87

2.14.3 Rules regarding objections and appeals 87

2.14.4 Alternative Dispute Resolution (ADR) 88

2.15 Secrecy and confidentiality 89

2.16 Tax rates applicable to any natural person, deceased estate, insolvent

estate, special trust, trusts and company 89

3 VALUE-ADDED TAX (VAT) 95

3.1 Introduction 95

3.2 Rates 95

3.3 Who is liable for the payment of VAT? 95

3.4 Presumptive tax an alternative to VAT registration 97

3.5 Items subject to the standard rate 97

3.6 Items subject to the zero-rating 97

3.7 Exemptions 98

3.8 Tourists, diplomats and exports to foreign countries 98

3.8.1 Tourists 98

3.8.2 Diplomats 100

3.8.3 Exports to foreign countries 100

3.8.4 Small Retailers VAT Package 100

4 CUSTOMS 104

4.1 Introduction 104

4.2 The Southern African Customs Union (SACU) 106

4.3 Free trade agreements and preferential arrangements with

other countries 107

4.3.1 Bi-lateral Agreements (Non-reciprocal) 107

4.3.2 Preferential dispensation for goods entering SA (Non-reciprocal) 1074.3.3 Free or Preferential Trade Agreements (FTAs or PTAs) (Reciprocal) 107

4.3.4 Generalised System of Preferences (GSPs) (Non-reciprocal) 108

4.4 Duties 108

4.4.1 Customs duty 108

4.4.2 Specific excise duties and specific customs duties on imported

goods of the same class or kind 109

4.4.3 Ad valorem excise duties and ad valorem customs duties on

imported goods of the same class or kind 109

4.4.4 Anti-dumping and countervailing duties on imported goods 110


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4.5 VAT Importation of goods 110

4.6 Customs value 111

4.7 Customs declarations 111

4.8 Goods imported for inward or outward processing 112

4.9 General rebates of customs duties 112

4.10 Persons entering SA 112

4.10.1 Goods imported without payment of customs duty and which are

exempt from VAT 113

4.10.2 Customs clearance procedures for travellers 115

4.11 Implementation of a Single Administrative Document (SAD) 116

4.12 Goods accepted at appointed places of entry 117

4.13 Cargo entering SA 117

4.14 State warehouses 117

4.15 Importation of household effects by immigrants/returning residents 117

4.16 Motor vehicles 118

4.17 Motor vehicles imported on a temporary basis 118

5 EXCISE DUTIES AND LEVIES 118

5.1 Specific Excise duties 119

5.2 Ad valorem Excise duties 120

5.3 General Fuel Levy and Road Accident Fund Levy 121

5.4 Environmental Levy 121

6 TRANSFER DUTY 122

7 ESTATE DUTY 122

8 STAMP DUTY 124

9 UNCERTIFICATED SECURITIES TAX (UST) 124

10 SKILLS DEVELOPMENT LEVIES (SDL) 124

11 UNEMPLOYMENT INSURANCE CONTRIBUTIONS 125

12 AIR PASSENGER DEPARTURE TAX 12613 SOUTH AFRICAN RESERVE BANK EXCHANGE CONTROL

REGULATIONS 126

Annexure A: EXAMPLES OF HOW INCOME TAX IS CALCULATED 128

GLOSSARY

ADR : Alternative Dispute Resolution

CGT : Capital Gains Tax

BLNS : Botswana, Lesotho, Namibia and SwazilandCommissioner : Commissioner for the South African Revenue Service


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DTA : An agreement for the avoidance of double taxation between the

government of SA and the government of a foreign country

FOB : Free on Board

GATT : General Agreement on Tariffs and Trade

IT Act : Income Tax Act, No. 58 of 1962PAYE : Pay-As-You-Earn (Employees Tax)

SA : Republic of South Africa

SACU : South African Customs Union

SADC : Southern African Development Community

SARS : South African Revenue Service

SBCs : Small Business Corporations

SDL : Skills Development Levy

SITE : Standard Income Tax on Employees

SMMEs : Small, Medium and Micro Enterprises

STC : Secondary Tax on Companies

TCC : Tax Clearance Certificate

UST : Uncertificated Securities Tax

VAT Act : Value-Added Tax Act, No. 89 of 1991

VAT : Value-Added Tax


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1 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 collect all revenues that are due;

y ensure maximum compliance with relevant legislation; and

y 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 SARS employs approximately 15 000 employees

y Tax revenue to be collected for 2008/09 is R627,7 billion

y The number of registered taxpayers in 2007/08 was as follows:

o Companies 2,18 million

o Individuals 5,3 million

o Trusts 394 389

o Vendors (value-added tax) 745 487

o Employers (employees tax) 379 675

The tax revenue contribution for 2007/08 was made up as follows:

y Income Tax

o Personal Income Tax : 29,4%o Corporate Income Tax : 24,5%

y Secondary Tax on Companies : 3,6%

y Fuel Levy : 4,1%

y Value-Added Tax : 26,3%

y Customs Duties : 4,7%

y Excise Duties : 3,2%

y Other : 4,2%


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1.4 Overview of Taxes

Various taxes are levied by the National Government in terms of the IT Act.

Such taxes are:

y Income tax.

y Withholding tax on foreign entertainers and sportspersons.

y Withholding tax on payments to non-residents on the sale of their

immovable property in SA.

y Donations tax.

y 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,


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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 governmentalbodies 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.

Transferduty, estate duty, stamp duty and uncertificated securities tax (which

has been replaced with a Securities Transfer Tax effective from 1 July 2008)


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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 fromthe 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.


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2 INCOME TAX

2.1 Introduction

2.1.1 Main source of Governments income

Income tax is the Governments main source of income and is levied in terms of

the IT Act.

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 followingyear.

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.


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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). Pay-as-you-earn (PAYE).

Income tax. Provisional tax.

Skills Development Levy (SDL).

Unemployment Insurance Fund (UIF).

Secondary tax on companies (STC).

Transfer duty and stamp duty.

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 thetaxpayers 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
http://www.sarsefiling.co.za/http://www.sarsefiling.co.za/


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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 ordeemed 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 withthe 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


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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

2.2.1 Individuals

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.

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


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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 entitiesAny 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 boardof 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


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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 Afr ican residents working outs ide 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 anyperiod 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 bythat 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.


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(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 thecountry 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.


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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

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


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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 inconsequence of the employees transfer from one place of employment to


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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 domesticservice 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,


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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

2.4.1 Taxation of income from employment

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.

2.4.2 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.


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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 it covers the employee against the loss of income as a result of illness,

injury, disability or unemployment; and

y 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


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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 employeestax.

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


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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 thecontrol 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 full-

1A connected person generally means in relation to

a natural person- a relative of a natural person and any trust of which a naturalperson 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 acompany, who individually or jointly with any other connected person in relation tohim/herself holds directly or indirectly at least 20% of the companys equity sharecapital 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 certain legal costs, bad debts, contributions to pension/provident

funds/medical schemes;

y operating expenses in respect of premises; and

y 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.


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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 Guidelinesavailable 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 anticipatedfor 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 orvia 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


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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 otherincome (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 year-

end 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. Thedefinition 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. Thisprovision 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.


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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;

hduring 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.


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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 and used regularly and

exclusively for trade

B = 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.


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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 contr ibutions

(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.

Retirement-funding employment is the portion of the

remuneration that is used to calculate the contributions to a

pension or provident fund. Any excess may not be carried

forward to the following year of assessment.

(ii) Arrear contributions

These are the amounts paid in respect of past periods taken

into account as pensionable service. 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 contribut ions

(i) Current contributions

An amount which does not exceed the greater of -

15% of the remaining amount after the deduction fromincome (excluding income derived from retirement-

funding 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


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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 onthe 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 ofcommunication;

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(ii) R1 140 per month in respect of the taxpayer and one

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


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(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 000may 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


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terms of that policy constitute or will constitute income as defined

in the IT Act.

(g) Bad and doubt ful 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 Prohib ited 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 The cost incurred in the maintenance of the taxpayer, his/her family or

his/her establishment.

x 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 deduction

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.

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


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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 traveland 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


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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;

hwhere the accommodation to which that allowance or advancerelates 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) the cost borne by the employer, less any amount paid by the

employee; or

(b) 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


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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 forbona 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 forbusiness purposes, the benefit is 2.5% per month on the determined


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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 securit ies

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. Anequity 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.

2.4.9Pensions

DTAs generally provide that a pension will be taxed in the country where thepensioner 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) War veterans pensions.

2) Compensation in respect of diseases contracted by persons employed in

mining operations.

3) Disability pensions paid under section 2 of the Social Assistance Act,

1992 (Act No. 59 of 1992).

4) 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


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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) Any amount received by or accrued to any resident under the social

security system of any other country.

8) 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) A pension or annuity received by a resident from a pension, provident, or

retirement annuity fund, unless one of the exemptions above applies.

2) A pension or annuity received from the South African Government.

3) 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.


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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

taxation_in_sa_2009_2008_-_09pdf

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