Tutorial Letter 104/0/2017 - University of South · PDF fileTutorial Letter 104/0/2017 Advanced ... South African Income Tax 2017, ... Interpretation notes Candidates must work through

Tutorial Letter 104/0/2017

Advanced Taxation (CTA Level 1)

Year module

Department of Financial Intelligence

This tutorial letter contains learning units 4 to 7 as well as self-assessment Assignment 02.

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Bar code

TAX4861/104/0/2017

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CONTENTS PAGE

ORIENTATION 1

1. INTRODUCTION 1

2. PROPOSED WORKING METHOD 1

3. TIME FRAME AND WEEKLY STUDY PROGRAMME 1

4. BEANCOUNTER SCENARIOS 2

5. IMPORTANT DATES FOR THIS TUTORIAL LETTER AND ERRATA 2

6. INSTRUCTION ICONS (LEGENDS) AND ABBREVIATIONS 3

7. LECTURERS 3

8. DESCRIPTION OF SAICA'S LEARNING LEVEL 3 – refer to TL103, p 6 4

9. OPEN-BOOK POLICY 4

DAY 1 – WORK PLAN FOR 22 FEBRUARY 2017 5

4.1 BACKGROUND 6

4.2 OUTCOMES OF THIS LEARNING UNIT 6

4.3 IMPORTANT LAW AMENDMENTS 6

4.4 BEANCOUNTER SCENARIO 7

4.5 DETERMINATION OF TAXABLE INCOME AND NORMAL TAX 8

4.6 GROSS INCOME 8

TABLE: SUMMARY OF CASE LAW 9

4.7 SPECIAL INCLUSIONS TO gross income 16

4.8 SHARE TRANSACTIONS 16

4.9 EXEMPT INCOME 17

4.10 OUTCOMES OF THE BEANCOUNTER SCENARIO 19


5.1 BACKGROUND 21

5.2 OUTCOMES OF THIS LEARNING UNIT 22


5.4 THE MEANING OF RESIDENCE 22

5.4.1 Residence of natural persons 22

5.4.2 Residence of persons other than natural persons 23

5.4.3 Change of residence - section 9H 24

5.5 THE MEANING OF SOURCE 24

5.5.1 Source rules – section 9 24

5.5.2 Source rules – other income (case law) 25

5.6 NON-RESIDENTS 26

5.6.1 Income of non-residents 26

5.6.2 Withholding taxes applicable to income received by non-residents 30

5.6.3 Summary of income received by non-residents and applicable withholding taxes (grey-highlighted sections in italics are excluded) 31

5.6.4 Summary of taxes applicable to non-residents 34

5.7 DOUBLE TAX AGREEMENTS (DTAs) 34

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6.1 BACKGROUND 38

6.2 OUTCOMES OF THIS learning UNIT 39

6.3 IMPORTANT LAW AMENDMENTS 39 6.4 BEANCOUNTER SCENARIO 39 6.5 STUDY APPROACH 40 6.6 THE GENERAL DEDUCTION FORMULA (section 11(a) and section 23) 40 6.7 OUTCOMES FOR THE BEANCOUNTER SCENARIO 46 DAY 3 and 4 – WORK PLAN FOR 24 and 25 FEBRUARY 2017 48

7.1 BACKGROUND 49

7.2 OUTCOMES of THIS LEARNING UNIT 50


7.4 BEANCOUNTER SCENARIO 52 7.5 PARTS I AND II OF THE EIGHTH SCHEDULE 53

7.5.1 Interaction between the normal tax framework and CGT 53

7.6 PART III OF THE EIGHTH SCHEDULE – DISPOSAL OF ASSETS 56

7.6.1 Paragraph 11: disposals 57

7.6.2 Paragraph 12: events treated as disposals and acquisitions (deemed disposals) 57

7.6.3 Paragraph 13: time of the disposal 60

7.6.4 Paragraph 14: disposals by spouses married in community of property 60

7.7 PART V OF THE EIGHTH SCHEDULE – BASE COST 60

7.7.1 Base cost of an asset – paragraph 20 61

7.7.2 The workings of paragraph 22 62

7.7.3 Base cost of pre-valuation date assets (acquired before 1 October 2001) 63

7.8 PART VI OF THE EIGHTH SCHEDULE - PROCEEDS 65

7.8.1 Proceeds (general – paragraph 35) 66

7.9 PART IV OF THE EIGHTH SCHEDULE – LIMITATION OF LOSSES 66

7.9.1 Paragraph 15: certain personal-use assets 66

7.9.2 Interaction between paragraphs 12A, 39, 56, 20(3) and 35(1)(a) 66

7.10 PART VIII OF THE EIGHTH SCHEDULE - OTHER EXCLUSIONS 68

7.11 PART VII OF THE EIGHTH SCHEDULE - PRIMARY RESIDENCE EXCLUSION 69

7.11.1 Primary residence exclusion 70

7.11.2 Primary residence exclusion (general) 70

7.11.3 Non-residential use: paragraph 49 72

7.12 PART IX OF THE EIGHTH SCHEDULE - ROLL-OVERS 73

7.12.1 Roll-overs (general) 73

7.12.2 Paragraph 67: transfer of asset between spouses 73

7.13 DEALT WITH IN LATER TUTORIAL LETTERS 73

7.14 OUTCOMES OF THE BEANCOUNTER SCENARIO 74

SECTION B - INTEGRATED EXAMPLES 77 SECTION C - SELF-ASSESSMENT ASSIGNMENT 90 ANNEXURE A: DTA's 147

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Please note

Owing to Unisa's print schedule, this tutorial letter had to be submitted by a certain date so that you would receive it on time. The 2016/2017 Income Tax Act had not yet been promulgated and this means that this tutorial letter was based on the Taxation Laws Amendment Bill of 2016 as of October 2016. This should not affect the content of this module. However, should there be any major changes between the Taxation Laws Amendment Bill and the promulgated Taxation Laws Amendment Act, we will communicate these to you.

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1. INTRODUCTION This tutorial letter deals with the normal tax implications of receipts and accruals, as well as general deductions, as follows:

Learning unit 4 deals with the determination of income (gross income less exempt income) and share transactions (section 9C).

Learning unit 5 deals with residents, non-residents and double tax agreements.

Learning unit 6 deals with the general deduction formula.

Learning unit 7 deals with the determination of taxable capital gains and assessed capital losses. The goal of the tutorial letter is to assist you in making the most of the time available to master the topics in this tutorial letter. Follow the guidelines and keep to the time limits (remember that these limits are based on the fact that certain topics have already been covered in your previous studies).

2. PROPOSED WORKING METHOD Start off by reading the tutorial letter. The tutorial letter will guide you as to how to obtain the knowledge from the textbooks and the Income Tax Act. After you have obtained the knowledge, it should be easier to apply it when answering the questions.

3. TIME FRAME AND WEEKLY STUDY PROGRAMME The learning units in this tutorial letter should be covered during the week of 22 February – 28 February 2017 as set out in the 2017 study programme in CASALL1_301/2017. Your time during this week should be divided into two parts:

Obtaining the required knowledge (15 hours) This would entail working through this tutorial letter, the textbooks and familiarising yourself with the

Income Tax Act (section A of this tutorial letter).

Application of knowledge (15 hours) This would entail the completion of the integrated examples and self-assessment assignment (sections B and C of this tutorial letter).

We assume that you have 3 hours’ study time on a week day/night and 15 hours on a weekend. We have based the work plan in this tutorial letter on this assumption.

ORIENTATION

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The suggested study programme for the week is as follows:

Day Date Topic

Wednesday Day 1 22 February Learning unit 4: Gross income, special inclusions, share transactions and exempt income – 3 hours

Thursday Day 2 23 February Learning unit 5: Residence, source rules, non-residents and double tax agreements (DTAs) – 3 hours

Friday Day 3 24 February

Learning unit 6: The general deduction formula (section 11(a) and section 23) – 2 hours

Learning unit 7: Determination of capital gains and losses – 1 hour

Saturday Day 4 25 February Learning unit 7: Determination of capital gains and losses – 5 hours 45 minutes

Section B of this tutorial letter – 1 hour 45 minutes

Sunday Day 5 26 February Section B of this tutorial letter – 1 hour

Section C of this tutorial letter – 6 hours 30 minutes

Monday Day 6 27 February Section C of this tutorial letter – 3 hours

Tuesday Day 7 28 February Section C of this tutorial letter – 3 hours

4. BEANCOUNTER SCENARIOS We'll be continuing our investigation of the Beancounter family's tax problems and financial affairs. To follow this you will need to refer back to page 14 of TL101/2017 as well as TL103/2017.

5. IMPORTANT DATES FOR THIS TUTORIAL LETTER AND ERRATA IMPORTANT DATES Due date for self-assessment Assignment 02: 28 February 2017 Date of test 1: (confirm final date on website) 14 March 2017 (TL102 (chapters 1 & 4 (gross

income) and chapters 2 & 5 (general deduction formula) court cases), TL103 and TL104)

Note: The topics in this tutorial letter, together with those dealt with in TL102 relating to gross income, source, residence and the general deduction formula, as well as topics in TL103 (and the related court cases in TL102) will be assessed in test 1.

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6. INSTRUCTION ICONS (LEGENDS) AND ABBREVIATIONS In this tutorial letter the following instruction icons appear:

Time allocation

Work programme or instruction or activity

Important or additional information

Examples or exercises

Information relating to changes in legislation

A list of abbreviations used in the learning unit

Suggested solutions to the questions in sections B and C

Outcomes of the learning unit

The following abbreviations are used in this tutorial letter:

Abbreviation Meaning of abbreviation

SILKE SILKE: South African Income Tax 2017, M Stiglingh et al

AQSAT Advanced Questions on SA Tax 2017, Parsons, S (Editor)

Student Handbook SAICA Student Handbook 2016/2017 Volume 3

the Act The Income Tax Act No. 58 of 1962

TL Tutorial letter

Par Paragraph

S Section

LU Learning unit

7. LECTURERS The following lecturers compiled this tutorial letter:

Mr CL Campher Ms A Heyns Ms MM Pretorius

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Please contact any of the tax lecturers should you have questions about this tutorial letter or any academic matters. You can also send your queries regarding academic matters via e-mail to:

[email protected]. You can contact your lecturers telephonically by calling

The administrative officer on +27 12 429 2947 who will put you in touch with a lecturer on duty,

or will take a message; and an available lecturer will contact you as soon as possible.

The hunting line +27 12 429 4135 – let the phone ring so that the exchange can find a free

extension.

Any of the lecturers.

8. DESCRIPTION OF SAICA'S LEARNING LEVEL 3 – refer to TL103, p 6

Interpretation notes Candidates must work through all interpretation notes on level 3 topics (only those that are included in the SAICA Student Handbook).

The TABLE OF REFERENCE provides you with a summary of the sections in the Income Tax Act and the appropriate references to SILKE, which are covered in a learning unit. For Learning units 4 – 7 in this tutorial letter, the table of reference has not been provided as a whole and placed at the beginning of each learning unit, but has been divided into smaller parts and placed throughout the learning unit.

The TABLE OF REFERENCE provides the following: SAICA LEVEL 3 A provision is either included at knowledge level 3 or it is excluded.

REFERENCE TO NOTES Where reference is made to another tutorial letter, you should understand the principles and be able to apply them for the purposes of this learning unit, but study them in more detail in the tutorial letter referred to.

Reference may be made to previous tutorial letters. In other words, learning units may be integrated with knowledge acquired in previous tutorial letters as well as other learning units in the same tutorial letter.

SECTIONS IN SILKE WHICH YOU MAY IGNORE When working through SILKE, you may IGNORE all the paragraph headings that are shaded grey, since these sections are excluded from SAICA’s Taxation Examinable Pronouncements for taxation legislation examinable in the ITC for 2018 and are also excluded from your 2017 tax syllabus.

9. OPEN-BOOK POLICY

VERY IMPORTANT

UNISA's open-book policy Refer to the announcement on myUnisa regarding the open-book policy approved by

UNISA's top management.

SAICA's open-book policy Refer to CASALL2/301/2017 on myUnisa, p 5 "Open book and calculator policy".

mailto:[email protected]

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We assume that you have 3 hours’ study time on a week day/night and 15 hours on a weekend. We have based the work plan in this tutorial letter on this assumption.

DAY 1 – WORK PLAN FOR 22 FEBRUARY 2017

A total of 3 hours (day 1) of your study time is allocated to learning unit 4. The following time allocation for day 1 is recommended:

Determination of income (gross income less exempt income) and share transactions (section 9C)

Minutes

4.1 Background 5

4.2 Outcomes of this learning unit 5

4.3 Important law amendments 5

4.4 Beancounter scenario 5

4.5 Determination of taxable income and normal tax 10

4.6 Gross income 50

4.7 Special inclusions to gross income 30

4.8 Share transactions (section 9C) 15

4.9 Exempt income 45

4.10 Outcomes of the Beancounter scenario 10

Total 180

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4.1 BACKGROUND Learning unit 4 deals with income as defined in section 1 of the Income Tax Act (which we will refer to as the Act from now on), meaning gross income less any applicable exemptions (exempt income). By now, you should have a good knowledge of gross income and exempt income. In this learning unit concentrate on those areas that were not covered in your previous studies and master the more complex issues of this unit. When you plan your study time, also bear in mind that most of these areas would have been covered in depth in your previous studies. While reviewing, concentrate on recent amendments to the Act, as these tend to receive more attention in the ITC examinations. Also, take into account the required level of knowledge as indicated in the SAICA examinable pronouncements. Where the relevant section will be discussed in a later tutorial letter, we will indicate this and we won’t discuss the section in detail in this tutorial letter. 4.2 OUTCOMES OF THIS LEARNING UNIT

After studying unit 4, you should be able to meet all the outcomes listed at the beginning of chapters 2 (Gross income), 3 (Income and capital), 4 (Special inclusions), 6 (Exempt income) and the outcome relating to section 9C in chapter 21 (last bullet) of SILKE.

4.3 IMPORTANT LAW AMENDMENTS In terms of SAICA’s Taxation Examinable Pronouncements, tax amendments promulgated by 31 January 2017, and which are effective for the 2017 year of assessment, will be examinable. All amendments effective for years of assessment 2018 or later are not examinable. The UNISA syllabus is based on these dates. Any amendments effective after these dates will therefore not be incorporated into our study material.

UNISA as well as the SAICA ITC 2018 will therefore test individuals with a 2017 year of assessment and non-natural persons with a December 2017 (or earlier) year of assessment.

Before continuing with learning unit 4, take note of the following proposed amendments to the Act which are contained in the Taxation Laws Amendment Bill of 2016 and which are relevant to this learning unit:

Law amendments proposed in the Taxation Laws Amendment Bill 17 of 2016:

Section 9C The recoupment provisions of s 9C(5) have been amended and no

longer apply to the disposal of equity shares held in a resident REIT (real estate investment trust) or a controlled company as defined in s 25BB(1) (i.e. a subsidiary of a REIT), that is a resident. This amendment is deemed to apply in respect of years of assessment ending on or after 1 January 2016.

Section 10(1)(q) Section 10(1)(q) exempts bona fide scholarships or bursaries awarded

by an employer to an employee from income, subject to certain limitations. The remuneration proxy of an employee in respect of a year of assessment has been increased from R250 000 to R400 000 (refer to proviso (ii)(aa)). Also, the exemption of R10 000 that applies to a scholarship or bursary granted to a relative of an employee in a year of assessment in respect of grades R to 12 and that also applies to a qualification to which an NQF level 1 up to and including level 4 has

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been allocated (in accordance with the National Qualifications Framework Act), has been increased to R15 000 (refer to proviso (ii)(bb)(A)). Furthermore, the exemption of R30 000 in a year of assessment that applies in respect of a qualification to which an NQF level 5 up to and including level 10 has been allocated, has been increased to R40 000 (refer to proviso (ii)(bb)(B)).

These amendments will apply in respect of years of assessment commencing on or after 1 March 2016.

Section 10A Section 10A has been amended by the insertion of par (c) to subsection

(7) and provides that the calculated capital element of an annuity amount will remain the same for all annuity amounts in respect of each year of assessment under the annuity contract.

This amendment is deemed to have come into operation on 8 January 2016.

4.4 BEANCOUNTER SCENARIO

Before you start studying the detailed provisions of the Act, read the following scenario relating to the Beancounter family. The scenario requires you to read through the information provided. Then you should, as you study the different income tax provisions, identify areas of concern that should be brought to the attention of the Beancounter family. Refer back to page 14 in TL101/2017 and pages 12 and 31 in TL103/2017 for background information on the Beancounter Family.

By now you know that Barry Beancounter (51 years old and married in community of property to Bizzie) is the managing director of Clothing Manufacturers (Pty) Ltd. Shortly before his mother’s death, during this year, Barry purchased her share portfolio for R1.8 million (at market value). Barry did not mind to acquire the portfolio from his mother at market value, because he was of the opinion that it was a good investment. The share portfolio is excluded from the joint estate. The portfolio consists of shares in blue chip South African companies. Barry estimated that the dividends received on these shares will be 5% of the portfolio. Barry wants to invest in foreign companies. He also plans to actively diversify the inherited portfolio. He feels that he should keep track of the movements in the portfolio on a daily basis on the internet and sell and acquire shares as he sees fit. Barry would like to know if dividends are included in taxable income and if there will be any negative tax implications if he actively diversifies his portfolio in shares.

Before attempting to help Barry with his queries, work through and master learning unit 4. Only then will you be ready to identify areas of concern that should be brought to the attention of the Beancounter family.

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4.5 DETERMINATION OF TAXABLE INCOME AND NORMAL TAX

Read par 1.1 – 1.3 in SILKE for an overview of the taxes levied by the Act and the

determination of taxable income and normal tax liability.

Read the definitions of gross income, income, taxable income and person in section 1 of the Act.

Study the notes provided below.

Content are on a SAICA level 3.

Normal tax framework The normal tax framework is derived from the definitions in the Act of gross income, income and taxable income. When studying any unit dealing with income tax, you must always keep this framework in mind:

GROSS INCOME (defined in section 1) LESS: Exempt income (section 10, 10A, 10B and 10C) = INCOME (defined in section 1) LESS: Deductions ADD: Amounts to be included in taxable income including TAXABLE CAPITAL GAIN LESS: Qualifying donations (section 18A) = TAXABLE INCOME (defined in section 1) TAXABLE INCOME is used to calculate NORMAL TAX

4.6 GROSS INCOME Gross income is certainly the most important definition in the Act and also one of the most comprehensive ones. You should therefore study it in detail, together with the case law (refer to TL102) applicable to it.

Revise the definition of gross income in section 1 of the Act and study par 2.1 in SILKE. In

this learning unit you may focus on part (i) of the definition of gross income, dealing with residents. Part (ii), dealing with non-residents, will be discussed in detail in the following learning unit.

SAICA level 3.

Revise pages 3 to 5 in TL102/2017 - Preface to the Interpretation and Application of Legislation and the Tax Cases Syllabus, and learning unit 1 – Interpretation and Application of Legislation on pages 6 – 9 in TL102/2017.

Study the rest of chapters 2 and 3 in SILKE in detail.

Study Interpretation note 14 (Allowances, advances and reimbursements), Interpretation note 76 (The tax treatment of tips for recipients, employers and patrons) and Interpretation note 18 (Rebate or deduction for foreign taxes on income) in the Student Handbook.

Whenever a court case is mentioned in SILKE, you should study that court case, except if that court case is not discussed in TL102/2017. You will find a summary of the applicable case law in the table below and in learning unit 6 of this tutorial letter.

The principles of gross income are applied widely in any question on income tax. The topic also lends itself to discussion-type questions and you should keep this in mind when preparing for tests and examinations.

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TABLE: SUMMARY OF CASE LAW

This table contains a brief summary of the cases prescribed by SAICA. For a detailed summary and proper discussion of these cases, refer to TL102/2017. Also, for the remainder of the cases, i.e. the cases not relevant to the topics covered in this tutorial letter, as well as the “teaching aid” cases, also refer to TL102. Note that you only have to study the case law in TL102. Therefore, you may ignore the case law mentioned in SILKE which are not dealt with in TL102 (which will be highlighted in grey in the textbook).

A note on how to study and refer to case law: Mark(s) will be awarded in the exam for stating the correct principle(s) of important case law and bonus mark(s) may be available for stating the correct (relevant) case name. You will find that the allocated study time is limited and you will require additional reading time to study case law. It is for this reason, that is to aid you and guide you, that we have included short summaries of the case law in the respective learning units where applicable - highlighting those tax principles that emerged from or were considered by the courts and that are important for your study purposes. Note that it is not an exhaustive list of established principles and merely provides an indication of the relevant part(s) of the tax legislation considered and principles considered/established in the respective cases. It should therefore be used merely as an aid in guiding you to a better understanding when reading the case law and applying the relevant principle(s) of particular cases to a particular set of facts.

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Name of court case

Relevant to Principle established/considered

CIR v Butcher Bros (Pty) Ltd

Definition of gross income – "total amount"

The word "amount" means an amount having "an ascertainable money value" and the onus is initially on the Commissioner to prove that an amount has accrued to the taxpayer.

CIR v People's Stores (Walvis Bay) (Pty) Ltd

Definition of gross income – "total amount" & "accrued to"

It was held that income can be money or "every form of property earned by the taxpayer, whether corporeal or incorporeal, which has a money value". Income in a form other than money must be of such a nature that a value can be attached to it in money. Due to a change in legislation the court ruled that the person has only become entitled to the amount will forms part of the gross income, irrespective of whether it is immediately enforceable or not.

WH Lategan v CIR


"Accrued to" means "become entitled to".

CSARS v Brummeria Renaissance


In this case the investors in a retirement village granted interest-free loans to the taxpayer (developer) as quid pro quo (in return for) the acquisition of life interests in the residential units of the retirement village. It was held that rights which are of a non-capital nature and which are capable of being valued in money are included under gross income. The quid pro quo aspect (something given in return) is clearly the distinguishing feature of this case.

Geldenhuys v CIR Definition of gross income – "received by"

An amount is only received by a taxpayer if it is received by that taxpayer on their own behalf and for their own benefit.

CIR v Delagoa Bay Cigarette Co, Ltd

Definition of gross income – the legality or otherwise of the business productive of income

It introduced the principle that in determining whether an amount is income or not, no account must be taken of the fact that the activity involved was illegal, immoral or ultra vires.

MP Finance Group CC (In Liquidation) v CSARS

Definition of gross income – "received by"; the legality or otherwise of the business productive of income

The taxpayer in this case ran an illegal pyramid scheme. It was held that the amounts paid to the scheme were accepted by the operators of the scheme with the intention of retaining them for their own benefit and notwithstanding that in law, they were immediately repayable, they constituted receipts within the meaning of the Income Tax Act.

Pyott Ltd v CIR Definition of gross income – "received by"

In this case, the court suggested that if the moneys received as deposits for the tins had been banked in a separate trust account set up specifically for the deposits received, then such amounts deposited would not constitute gross income.

Mooi v SIR Definition of gross income – "accrued to"

The decision in this case amplified the meaning of "accrued to" to mean "become entitled to unconditionally".

CIR v Witwatersrand Association of Racing Clubs

Definition of gross income – "accrued to"

Once an amount has been beneficially received by or accrued to a taxpayer, that amount is taxed even though the taxpayer may have an obligation to pay it over to some other person. Where a taxpayer divests themselves of income prior to it accruing to them by ceding the right to future income, the income accrues to the cessionary rather than the taxpayer. In tax terms, such an arrangement is referred to as antecedently divesting oneself of income.

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Name of court case


Cohen v CIR Definition of gross income – meaning of "ordinary resident"

It was held that a person's ordinary residence was the country to which they would naturally and as a matter of course return from their wanderings, their usual or principal residence and could be described as their real home.

CIR v Kuttel Definition of gross income – meaning of "ordinary resident"

It was held that a person was ordinarily resident where they had their usual or principal residence. It was held that the formulation in Cohen should be adopted - that a person is ordinarily resident where they have their usual or principal residence, that is, what may be described as their real home.

CIR v Lever Brothers and Unilever Ltd

Definition of gross income – "from a source within … the Republic"

No longer very important. However, it does discuss the concept of the originating cause, which is the foundation for establishing the source of a receipt.

CIR v Visser Definition of gross income – of a capital nature – the nature of the asset

This case introduced the "tree and fruit" principle, namely that the tree is capital in nature and the fruit is revenue in nature.

Natal Estates Ltd v SIR

Definition of gross income – of a capital nature – intention

In determining whether the proceeds on the sale of agricultural land which had been held as a capital asset for over 45 years was capital or revenue in nature, the court looked to the intention of the taxpayer and whether it had changed its intention from holding onto the land as a capital asset or to embark on a scheme of profit-making. The court used the phrase that the taxpayer "had crossed the Rubicon" and gone onto a "scheme of profit-making" in deciding that the profits were of a revenue nature.

It was held the original intention of the taxpayer to hold that asset as an investment is always an important factor but that it is not necessarily decisive. A supervening change of intention, evidenced by a manner or method of realisation resulting in a scheme for profit-making, renders the profits of a revenue nature. The totality of the facts of the case must be considered. In any such enquiry important considerations will include the intention of the owner both when acquiring and selling the land; the objects of the owner, if a company; the owner's activities in relation to the land prior to their decision to sell and the light thereby thrown upon the owner's statements of intention; the nature and extent of their marketing operations. The onus is imposed on the taxpayer in terms of s 102 of the Tax Administration Act.

CIR v Richmond Estates


It was held that the company changed its intention towards the properties sold, and their sale at a profit as the result of a further decision arrived at owing to a change in conditions outside the company's control did not per se make the resulting profit subject to tax.

COT Southern Rhodesia v Levy


It illustrates the principle that where there are two possible motives at the time an asset is purchased, the dominant motive (if there is one) prevails especially where an individual taxpayer is involved. Where the asset is purchased with a dual motive, one motive not being substantially dominant over the other motive, then the revenue motive prevails.

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Name of court case


CIR v Nussbaum Definition of gross income – of a capital nature – intention

It was held that the frequency of the taxpayer's share transactions, viewing them purely in isolation, provides evidence of continuity, being a necessary element in the carrying on of a business in the case of an individual and one is struck forcibly by the scale and frequency of the taxpayer's share transactions. Although the taxpayer was primarily an investor and it was wholly consistent with his investment motive that he did not sell certain holdings entirely and that 82% of the shares held at the beginning of the three-year period were still held at the end of the three-year period, this share retention factor therefore detracts in no measure from the force of all those circumstances which point to a subsidiary profit-making purpose. Accordingly, it was held that the taxpayer had a secondary, profit-making purpose and he had failed to discharge the onus of showing that the profits made were not of a revenue nature.

CIR v Stott Definition of gross income – of a capital nature – mixed or dual intention

The principle laid down by this judgment is that a person may realise their capital asset to best advantage and that the mere subdivision of land does not constitute a trade. Furthermore, the taxpayer's intention at the time the asset is purchased is decisive unless there is a subsequent change in intention and the taxpayer “crosses the Rubicon” (Natal Estates) by being involved in a scheme of profit-making.

John Bell v SIR Definition of gross income – of a capital nature – change in intention

A mere change of intention (the court was actually referring to the decision to sell the asset rather than keep it) to dispose of an asset hitherto held as capital does not per se render the profit resulting from the subsequent disposal of the assets liable to tax; something more is required in order to metamorphose the character of the asset and so render its proceeds gross income.

CIR v Pick ‘n Pay Employee share purchase trust

Definition of gross income – of a capital nature – scheme of profit-making

This case reinforces the principle that the proceeds on the sale of an asset will only be taxable where the realisation occurred in the course of a scheme of profit-making. This principle is true irrespective of whether it is an isolated transaction or a series of recurring transactions.

CIR v George Forest Timber

Definition of gross income – of a capital nature – the nature of the asset

The fixed capital vs floating capital test was established in this case. However, note that this test has to some extent become redundant and an enquiry into the capital/revenue nature of proceeds should not rely solely on this test.

Berea West Estates (Pty) Ltd v SIR

Definition of gross income – of a capital nature – change in intention

Where a realisation company does no more than realise its asset to best advantage, the proceeds of the sale will not be revenue in nature, but capital. However, the realisation company must ensure that it does not go beyond the mere realisation and embark on a trade or scheme of profit-making, thereby "crossing the Rubicon".

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Name of court case


CSARS v Founder's Hill

Definition of gross income – of a capital nature – change in intention

The court made it clear that an interposed realisation company

will stand in the shoes of the entity that has transferred

assets to it. The court held that if the original company intended to sell the property as part of a scheme of profit making, the realisation company acquired the property as trading stock. (This change in intention will now result in the application of paragraph 12(2)(c) of the Eighth Schedule).

The court made a distinction between the facts in question and the facts in the Berea West case (supra). In this case, the realisation company was formed for the sole purpose of acquiring property from the holding company, AECI Ltd, and then developing and selling it at a profit (thus the only purpose was the realisation of the assets (property). In Berea West there was, apart from the purpose of realising a capital asset to its best advantage, a real justification for the formation of the realisation company (in addition to the purpose of realising the assets).

Elandsheuwel Farming (Edms) Bpk v SIR


This case demonstrates that in the appropriate circumstances, the court can pierce the "corporate veil" and look to the profile of the shareholders (i.e. only in the case of private companies where the shareholders have a significant influence on the board of directors and the decision-making process; this will not be the case with a public company) to establish whether there has been a change in intention with regard to the capital asset of the company.

WJ Fourie Beleggings CC v CSARS

Definition of gross income – damages and compensation

There is a fundamental distinction between a contract which is a means of producing income and a contract meant to create income-producing structure. In this case the contract had been concluded as part of the taxpayer's business of providing accommodation and it was therefore part of the taxpayer's income-earning activities, not the means by which it earned income Thus, the compensation received for the cancellation of the contract was held to be revenue in nature as it filled a hole in the income.

Stellenbosch Farmers' Winery Ltd v CSARS

Definition of gross income – damages and compensation

In deciding whether the nature of a compensation receipt (for the cancellation of exclusive distribution rights that the taxpayer had in order to distribute Bells whiskey throughout South Africa) was either revenue or capital in nature. The court accepted the argument that the nature of a receipt is not determined by how it is subsequently treated for accounting purposes. The court considered the test whether a substantial part of the income-producing structure of the taxpayer had been sterilised. It was held that the termination agreement referred to payment of full compensation for the closure of the taxpayer's business relating to the exercise of the distribution rights (an asset). The taxpayer, which did not carry on the business of the purchase and sale of rights to purchase and sell liquor products, did not embark on a scheme of profit-making and the compensation receipt constituted a capital receipt.

CIR v Nel Definition of gross income – of a capital nature – mixed or dual intention

In deciding whether the sale of the Krugerrands represented capital or revenue profits, the evidence showed clearly that the taxpayer's purpose in selling the Krugerrands was not to make a profit but to realise a capital asset in order to acquire another capital asset. The court held that the Krugerrands in question were purchased, as it were, for "keeps'' and that the disposal of some of them was due to "some unusual, unexpected, or special circumstances" which supervened. The proceeds were accordingly held to be of a capital nature.

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Name of court case


Ernst Bester Trust v CSARS

Definition of gross income – capital or revenue nature of proceeds

Proceeds received by the taxpayer represented gains made in the operation of an ongoing scheme of profit-making over many years out of the sales of sand and the income so derived was reve-nue. The agreement was similar to a mineral lease and that the rental or royalties were "the product of capital productively employed" and therefore constituted income.

Section 22 was not applicable to unseparated in situ (still in the ground) deposits of sand. Accordingly, the court found that that the sand deposit could not fairly be described as trading stock held by the taxpayer for the purposes of section 22.

KBI en 'n Ander v Hogan

Definition of gross income – special inclusion: annuity

Paragraph (a) of the definition of gross income includes any amount received or accrued by way of annuity. It does not matter whether the annuity is of a capital nature or not. It was held in this case that although annuity is not defined in the Income Tax Act, it appeared that an annuity had two essential characteristics (which are, however, in no way exhaustive): it was an annual (or periodical) payment and the beneficiary had the right to receive more than one such payment.

Stevens v CSARS Definition of gross income – special inclusion: "in respect of services rendered"

The taxpayer, as part of his company's share incentive scheme, had acquired an option to buy its shares, but before the option could be exercised, the company went into voluntarily liquidation rendering such options valueless. The company accordingly made ex gratia payments to its employees. It was held that the recipients of the ex gratia payments were employees or ex-employees of the deceased employer's estate who had enjoyed a benefit directly linked to their employment, who had lost that benefit and who, in the board's discretion, were deserving in the particular circum-stances of a substitute ex gratia payment. Accordingly, the receipt fell within the terms of par (c) of the definition of gross income.

Illustrative example: How to answer a discussion question on gross income

Lucky B inherited money in 2011. He bought two residential duplex units, of R450 000 each, with his inheritance. He has since received rental income of R10 000 per month, which he has declared to SARS. He is emigrating to Australia and he decided to sell these units. The units were sold at R500 000 each to the tenants during the 2017 year of assessment.

REQUIRED: Marks

Discuss, with reference to case law, whether the R1 000 000 that he received for the two duplexes should be included in gross income or not.

20

15 TAX4861/104

Suggested approach to answering the question Provide the definition of gross income and briefly refer to the relevance of each of the requirements.

(1)

Identify the crux of the matter (problem), namely capital vs revenue. (1) In the Visser case (you must refer to the correct applicable case law) the "tree and the fruit" principle was introduced. The "fruit" is revenue in nature and the "tree" capital in nature.

(1)

(1) The duplexes are the "tree" and the rental income the "fruit". (1)

In the Stott case the test of intention was applied and the question to be asked is whether the taxpayer was busy with a scheme of profit-making or merely realising his capital asset to his best advantage.

(1)

(1) In the Natal Estates Ltd case it was asked whether the taxpayer had "crossed the Rubicon" and gone onto a scheme of profit-making (change of intention).

(1) (1)

The facts of each case must be considered and in any such inquiry important considerations will include

the intention of the owner both when acquiring and selling the asset

history of property transactions

continuity

method of finance (own funds or borrowed funds)

the extent of marketing

owner's activities prior to selling the asset

reason for sale

utilisation of proceeds

(3)

Lucky B bought the duplexes with the intention of keeping them as an investment to rent them out. The holding period of 6 years and the fact that he bought them with surplus funds are objective evidence of his intention.

(1)

(2)

He did not cross the Rubicon and go onto a scheme of profit-making. (1) He sold these assets because he is emigrating. He will not be able to look after his property. (1) He did not follow an extensive marketing strategy. He sold it to the current tenants. (1) He only wanted to realise his capital assets to his best advantage. (1) Conclusion: The amounts are of a capital nature and not part of gross income. (1)

Total 20

Take note of the REQUIRED part of the question. The question required only a discussion of gross income. If the question required a discussion of all income tax implications, you would have discussed the capital gains tax implications (learning unit 7) as well. If the question required a discussion of all tax implications, you would have discussed the capital gains tax and VAT implications of the transaction as well.

16 TAX4861/104

4.7 SPECIAL INCLUSIONS TO GROSS INCOME Paragraphs (a) to (n) of the definition of gross income include certain amounts in a taxpayer's gross income even though they may be of a capital nature. These receipts and accruals are referred to as the special inclusions. Although you should study all the special inclusions, some of them will be covered in more detail in other learning units.

Read par (a) to (n) of the definition of gross income in section 1 of the Act.

Study chapter 4 in SILKE in detail.

SAICA level 3.

Ignore paragraphs of the gross income definition that do not form part of the SAICA examinable pronouncements:

par (j) dealing with capital expenditure for mines

par (l) dealing with subsidies and grants on soil erosion works (par 4.15 in SILKE)

par (lA) dealing with amounts received by or accrued to sporting bodies (par 4.16 in SILKE)

par (lC) dealing with receipts or accruals of government grants

4.8 SHARE TRANSACTIONS

Read section 9C of the Act.

Study par 3.4.12 and par 21.10 in SILKE.

Section 9C is on SAICA level 3, except subsections 9C(2A), (3), (4) and (4A) which are excluded.

Generally the same rules (e.g. intention, change of intention) that would apply to the disposal of an asset will be taken into account with regard to shares (to determine the capital or revenue nature of the receipt or accrual). However, there is an exception to this general rule in the case of certain shares where the proceeds from the disposal will be deemed to be capital in nature. Section 9C was introduced into the Act to provide greater clarity on the capital or revenue treatment of share transactions. This section applies to the disposal of equity shares (previously “qualifying shares”) and deems the receipt arising on the disposal to be capital in nature. The equity share must have been held by the taxpayer for a continuous period of at least three years prior to disposal. An “equity share” includes a participatory interest in certain collective investment schemes (including a hedge fund investment scheme) and a hybrid equity instrument as defined in section 8E (section 8E is excluded from your syllabus). The taxpayer need not make an election in this regard; provided such equity shares have been held for at least three years prior to disposal, the proceeds will be capital in nature, even if that person is a share dealer.

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4.9 EXEMPT INCOME

Read section 10 of the Act as indicated in the table below.

Study chapter 6 in SILKE also as indicated in the table below.

Study Interpretation note 16 (Exemption from income tax: Foreign employment income) and General Binding Ruling 25 (Exemption – Foreign pensions) in the Student Handbook.

SAICA levels as indicated below.

Section in the Act SILKE Topic SAICA level

10(1)(a), (bA) and (bB) 6.27

Government and municipalities excluded

10(1)(c) 6.2 Salaries and emoluments excluded

10(1)(cA) 6.32.1 Specified research entities

excluded

10(1)(cE) 6.28 Political parties excluded

10(1)(cG) 6.29 Ships and aircraft – foreign owners and charterers

excluded

10(1)(cN) 30

6.23 Public benefit organisations

excluded excluded

10(1)(cO) 30A

6.30 Recreational clubs

excluded excluded

10(1)(cP) Company or trust contemplated in s 37A

excluded

10(1)(cQ) 6.24 Small business funding entity excluded

10(1)(d)(i) & (ii) 6.31 Benefit, pension, pension preservation, provident, provident preservation and retirement annuity funds

excluded

10(1)(d)(iii) & (iv) 6.32.2 Specified institutions excluded

10(1)(e) 6.3 Bodies corporate, share block companies and other associations

excluded

10(1)(g), (gA) and (gB) 6.4 War pensions and award for diseases and injuries

3

10(1)(gC) 6.5 Foreign pensions 3

10(1)(gE) 6.6 Minor beneficiary funds excluded

10(1)(gG) and 10(1)(gH) 10(1)(gI)

6.7 6.7

Proceeds from employer-owned insurance policies Disability policies

3

TL106/107

10(1)(h) and 10(2)(b) 6.17.2 Interest – non-residents 3 LU 5

10(1)(hA) 6.17.3 Interest – holder of a debt instrument excluded

10(1)(i) 6.17.1 Interest received 3

10(1)(iB) 6.22 Collective investment schemes excluded

10(1)(j) 6.8 Foreign banks excluded

10(1)(k)(i)(aa) and 10(2)(b) 6.9 Dividends 3

10(1)(k)(i)(dd-ii) 6.9 Dividends excluded

10(1)(l) 6.10.1 Payments to non-residents (royalties) 3

10(1)(lA) 6.10.2 Foreign entertainers and sportspersons 3

10(1)(mB) 6.11 Unemployment insurance benefits 3

10(1)(nA), (nB), (nC), (nD), (nE), (o)(ii)

6.18 (.1 - .7)

Employment 3

10(1)(o)(i) & (iA) Employment excluded

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Section in the Act SILKE Topic SAICA level

10(1)(p) 6.18.8 Employment – non-residents 3

10(1)(q) 6.12 Bursaries and scholarships 3

10(1)(r) Gratuity received by person retiring from public service declared by Treasury as tax free

excluded

10(1)(u) 6.13 Alimony and maintenance 3

10(1)(y) Government grants or government scrapping payments

excluded

10(1)(yA) Official development assistance agreement excluded

10(1)(zJ) 6.16 Micro businesses excluded

10(1)(t), (zE) 30B

6.32.2 Specified institutions

excluded

10(2) Exemptions in par (h) and (k) not applicable to an annuity

3

10(3) Exclusions from the exemptions 3

10A 6.19 Purchased annuities (capital element will be provided)

3

10B 6.9.7 Foreign dividends 3

10B(2)(b), (c), (4) & (6) 6.9.7 Foreign dividends excluded

10C 6.20 Exemption of non-deductible portion of compulsory annuities

TL107

12K 6.21 Certified emission reductions excluded

12O 6.14 Exploration rights of a film excluded

12P 6.15 State incentive schemes and industrial development awards

excluded

12Q 6.25 International shipping income excluded

12T 6.26 Income from tax-free investments (it will be stated whether or not the investment meets the requirements to be a “tax-free investment”)

3

12T(8) & (9) Income from tax-free investments excluded

Note on examination technique When answering a question in a test or examination, always indicate an amount which is gross income in terms of the definition, as such. If a full or partial exemption is then applicable to that amount of gross income, indicate the exemption separately. For example:

R

Dividend received (gross income) 50 000

Less: Exempt income (section 10(1)(k)(i)) (50 000)

If you only indicate the dividend as not taxable or Rnil, you will not receive all the marks allocated.

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4.10 OUTCOMES OF THE BEANCOUNTER SCENARIO

You have studied unit 4 and should now be able to answer Barry Beancounter's queries. Read through the Beancounter scenario again and make a rough summary of what your solution would be. You need not provide detailed references to specific sections, but rather just a list of all the different provisions that will have an effect on Barry Beancounter's queries.

In formulating your answer, you should have identified the following: There are two tax issues here:

Is the dividend income included in taxable income?

What are the tax implications if he actively starts to diversify the portfolio? Issue 1: Is the dividend income included in taxable income? Your answer should have included the following:

Mr Beancounter is a resident of the Republic. If his residency status is provided in the question, you should not discuss it because it is not part of the tax issue.

The dividends received on his portfolio are gross income (fruit of the tree and of a revenue nature).

You should discuss briefly that dividends tax (withholding tax) of 15% will be withheld on the dividends but that the gross amount will be added to gross income.

You should then mention that the dividends received from "local" companies will be fully exempt in terms of section 10(1)(k)(i), while foreign dividends received will not be exempt, except if they fulfil the requirements of section 10B, when they will be partly exempt.

Conclude your answer.

Note that there is a difference in meaning between the terms "gross income", "income" and "taxable income". You must read the question carefully to ensure that you are answering what is required. When answering, make sure you are using the correct term; you will lose marks if you use the incorrect terms.

Issue 2: What are the tax implications if he actively starts to diversify his share portfolio? You should have identified the crux of the matter, namely that the nature of the receipt from the buying and selling of the shares may change from capital to revenue. The issue here is: Is the portfolio of shares kept for investment purposes or speculation purposes? In other words, are the proceeds from buying and selling shares of a capital nature or a revenue nature?

20 TAX4861/104

What you should have covered in your answer:

Barry purchased the portfolio of shares from his late mother.

At the time when Barry acquired the portfolio of shares, the portfolio was a capital asset (it was acquired for investment purposes).

Will his intended manner of dealing with the capital asset (intention) change from investment to speculation if he actively buys and sells shares?

Objective factors such as the holding period of shares, the frequency of similar transactions and the nature of his occupation will be taken into account to establish if the objective factors support his intention. From the totality of facts the question must be asked whether he has crossed the Rubicon by using the shares as stock in trade (Natal Estates Ltd v SIR). If so, the nature of the portfolio of shares will then change to speculation.

On the other hand, Barry may only be protecting the value of his asset by diversifying it. This means that the portfolio of shares will still be an investment.

Remember to use the applicable court case(s) as well as the essence of the court case(s) to justify your answer.

You should also take the implications of section 9C into consideration, which will deem an equity share to be capital in nature if held for three years or longer.

Remind Barry of the onus (in terms of section 102 of the Tax Administration Act 28 of 2011) that rests on the taxpayer to justify his answer.

Provide a conclusion.

In the above scenario, there will be capital gains tax (CGT) implications if the portfolio changes from being capital in nature to revenue in nature. You will study CGT in LU 7.

____________________________________ END OF LEARNING UNIT 4

21 TAX4861/104


A total of 3 hours (day 2) of your study time is allocated to learning unit 5.

The following time allocation for day 2 is recommended:

Residents and non-residents and double tax agreements minutes

5.1 Background 5



5.4 The meaning of residence 30

5.5 The meaning of source 60

5.6 Non-residents 60

5.7 Double tax agreements (DTAs) 15

Total 180

5.1 BACKGROUND South Africa opted for a hybrid system for the years of assessment commencing on or after 1 January 2001. Its traditional source-based system of taxation still remains for non-residents but its residents are taxed on a residence (worldwide) basis of taxation. Residence as a basis of taxation is founded on the premise that because the taxpayer enjoys the comfort and protection of the country in which they reside, all of their income should be taxed in that country. Source, on the other hand, is based on the premise that because the resources of the country give rise to the income, the income should be taxed in that country. It is therefore important to be able to determine whether a person is a resident or a non-resident for tax purposes, as this will have an impact on the South African tax liability.

22 TAX4861/104

5.2 OUTCOMES OF THIS LEARNING UNIT

After studying learning unit 5, you should be able to meet all the outcomes listed at the beginning of chapter 5 (Residence and source) of SILKE.

5.3 IMPORTANT LAW AMENDMENTS

UNISA as well as the SAICA ITC 2018 will test individuals with a 2017 year of assessment and non-natural persons with a December 2017 (or earlier) year of assessment.

Before continuing with learning unit 5, take note of the following proposed amendments to the Act which are contained in the Taxation Laws Amendment Bill of 2016 and the Rates and Monetary Amounts and Amendment of Revenue Laws Bill of 2016 and which are relevant to this learning unit:


Section 50D Section 50D has been amended to provide for an additional exemption

from withholding tax on interest. Section 50D(1)(d) has been added and exempts from the withholding tax on interest any amount of interest paid to any of the following banks:

(i) African Development Bank (ii) World Bank (iii) International Monetary Fund (iv) African Import and Export Bank (v) European Investment Bank (vi) New Development Bank

This exemption is deemed to have come into operation on 1 March 2015 and applies in respect of interest that is paid or becomes due and payable on or after this date.

5.4 THE MEANING OF RESIDENCE 5.4.1 Residence of natural persons

Read par (a) of the definition of resident in section 1 of the Act.

Study par 5.1 - 5.2.1 in SILKE together with the notes provided below.

Study Interpretation note 3 (Resident: Definition in relation to a natural person – ordinarily resident) in the Student Handbook.

Also refer to the appropriate court cases on residence in the table of court cases in LU 4 of this tutorial letter.

SAICA level 3.

"Resident" as defined is wider than the concept of ordinarily resident, as it includes a physical presence test in its definition.

23 TAX4861/104

To establish whether a natural person is a resident, two tests are applied:

the ordinary residence test

the physical presence test (only done if NOT ordinarily resident in the Republic!) The following diagram is useful:

Is the person ordinarily resident in the Republic?

Yes No

Does he/she comply with the requirements of the physical presence

test?

Yes No

Resident

Deemed to be a

resident

Non-

resident

Refer to example 5.1 in SILKE for the physical presence test.

You won’t be required to calculate the number of days in and out of South Africa (physical presence test), but you are expected to know how to apply the principles of the physical presence test in appropriate circumstances (the number of days will be provided in questions). Remember that this test does not apply in the year of assessment that a person emigrates (ceases to be ordinarily resident). See SILKE 5.2.1.

5.4.2 Residence of persons other than natural persons

Read par (b) of the definition of resident in section 1 of the Act.

Study par 5.2.2 in SILKE together with the notes provided below.

Also refer to the appropriate court cases on ordinarily resident in the Republic in the table of court cases in LU 4 of this tutorial letter.

SAICA level 3.

24 TAX4861/104

5.4.3 Change of residence - section 9H

Read section 9H of the Act.

Study par 5.2.3 in SILKE.

SAICA level 3.

Section 9H provides for a single charge when a person ceases to be a resident. When a natural person or a company ceases to be a resident, that person is deemed to have disposed of all their assets at market value on the day before that person ceases to be a resident and reacquired all those assets at an expenditure equal to the market value on the day that person ceases to be a resident. This could trigger either a capital or a revenue gain. Subsection 9H(7) stipulates that the market value of such assets reacquired will be in the same currency in which the assets were originally acquired. In the case of companies a dividend in specie is also deemed to have been declared. More detail on this in TL105. Remember that in terms of section 9H(4), certain assets are excluded from this deemed disposal, for instance immovable property situated in the Republic. 5.5 THE MEANING OF SOURCE

Revise par (ii) of the definition of gross income in section 1 of the Act.

Read section 9 of the Act.

Read the first part of par 5.3 in SILKE.

Study par 5.3.1 and 5.3.2 in SILKE together with our notes and summaries below.

SAICA level 3.

The starting point to determine the source of income is section 9, which contains the source rules. Common law (case law) remains only as the residual method for categories of income not addressed by section 9, for instance rental income and income from annuities. The case law rule of originating cause will continue to be used for such income. 5.5.1 Source rules – section 9 The following table will assist you in understanding the source rules contained in section 9 (note that s 9(2)(c), (d), (e), (f) and (l) are excluded from SAICA’s Taxation Examinable Pronouncements for the reason that the source rules laid down in these subsections are the same as the rule with regards to interest in s 9(2)(b). You do not have to study these subsections, but we include them for the sake of completeness):

Type of income Section Source within the Republic in terms of section 9

Dividends 9(2)(a) Any dividend received or accrued.

Remember – dividend as defined excludes foreign dividends.

Interest received 9(2)(b) Interest received if the debtor is a resident OR if the funds are

utilised in the Republic.

Royalties 9(2)(c) If the person paying the royalty is a resident.

9(2)(d) If the intellectual property is used or the right to use is granted

in the Republic.

25 TAX4861/104

Type of income Section Source within the Republic in terms of section 9

Scientific, technical,

industrial or commercial

(STIC) knowledge or

information

9(2)(e) If the person paying for the STIC knowledge or information is a

resident.

9(2)(f) If the STIC knowledge or information is used or the right to use

is granted in the Republic.

Public office 9(2)(g)

Amounts received in respect of the holding of a public office to

which that person has been appointed in terms of an Act of

Parliament.

Public office 9(2)(h) Amounts received in respect of services rendered or work or

labour performed on behalf of an employer who is a

government entity etc., without any regard to where it is

rendered.

Pensions and annuities 9(2)(i)

9(3)(a)

The pro rata portion of pensions and annuities received

connected to the number of years of service rendered within

the Republic. Section 9(3)(a) links the source to the place

where the services were rendered.

Capital gain – immovable

property

9(2)(j) If the immovable property is situated in the Republic

(as defined in par 2 of the Eighth Schedule).

Capital gain – movable

property

9(2)(k) If the person who disposes of the movable property is a

resident.

Exchange differences 9(2)(l) If the person is a resident and the exchange item is not

attributable to a permanent establishment situated outside the

Republic OR the person is a non-resident and the exchange

item is attributable to a permanent establishment situated in

the Republic.

Recoupments in terms of

section 8(4)

Par (n) to the gross income definition.

5.5.2 Source rules – other income (case law) The following table will assist you in understanding the source rules of the case law:

Type of income Section Case law – originating cause

Contractual annuity None Contract in terms of which annuity is paid

Purchased annuity None In practice, the place where the contract was entered into

Rental income -

fixed property

None Where the fixed property is situated

Rental income – movable

property

None Emphasis on the

use of assets; or

location of business operations

Business income

None Carrying on of business or employment of business capital

(whichever is dominant)

Remuneration for services

rendered

None

Where the services were rendered

Foreign entertainers and

sportspersons

None Where the skills were applied

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Keep section 9(4) in mind when applying the case law rules to determine the source of income. Section 9(4) specifically determines that certain amounts received by a person are from a source outside the Republic and they cannot consequently be from a source within the Republic in terms of case law. Section 9 takes precedence over (overrides) case law. 5.6 NON-RESIDENTS 5.6.1 Income of non-residents

Revise par (ii) of the definition of gross income in section 1 of the Act.

Read the introduction of par 5.4 in SILKE.

Study par 5.4.1 together with par 6.17.2 in SILKE.

Study par 5.4.3, 5.4.4, 5.4.5 and 5.4.6 (examples) in SILKE.

Work through the examples provided below.

SAICA level 3.

In par 5.5 of this tutorial letter we examined the source rules in section 9 of the Act as well as the case law rules applicable to source. You must remember that a resident must include their worldwide receipts and accruals in gross income. A non-resident (also referred to as a foreigner), however, only needs to include receipts and accruals from a source within the Republic in gross income in terms of section 9 as well as case law. Whether dealing with a resident or a non-resident, the tax framework remains the same:

GROSS INCOME (defined in section 1) LESS: Exempt income (sections 10, 10A, 10B and 10C) = INCOME (defined in section 1) LESS: Deductions ADD: Amounts to be included in taxable income, including TAXABLE CAPITAL GAIN LESS: Qualifying donations (section 18A) = TAXABLE INCOME (defined in section 1) TAXABLE INCOME is used to calculate NORMAL TAX

The source rules are important as they determine which amounts must be included in the gross income of a non-resident. However, just as important are the relevant exemptions in section 10 of the Act, as well as the applicable withholding taxes. Once you have studied the above paragraphs in SILKE, work through the illustrative examples below.

Illustrative examples

Example 1 - Source rules

Piet Botha, 55 years old, emigrated from the Republic five years ago and has since been ordinarily resi-dent outside the Republic. He is also not a resident in terms of the physical presence test for South African income tax purposes for the 2017 year of assessment. He is therefore a non-resident and is taxed on income from a source within the Republic. (Ignore any double tax agreement (DTA), unless mentioned otherwise.) REQUIRED: State, with reasons, the amounts (if any) to be included in Piet Botha's taxable income in the Republic for the 2017 year of assessment.

27 TAX4861/104

Contractual annuity Before he emigrated, Piet purchased a 10-year annuity from a South African insurance company. He paid R180 000 for it and has been receiving R2 500 per month as from 1 March 2014. Piet received R30 000 (R2 500 x 12 months) during the 2017 year of assessment. Suggested solution As there is no specific source rule in terms of section 9 of the Act that can be applied, case law applies. The originating cause of the annuity is the contract in terms of which it is payable. As the contract was entered into in the RSA, the R30 000 is from a South African source and should be included in Piet's gross income. However, in terms of section 10A, Piet will be entitled to an exemption of the capital por-tion of the annuity amount, calculated as follows: R180 000/(R2 500 x 12 months x 10 years) x R30 000 = R18 000. The amount to be included in Piet's income: R30 000 - R18 000 = R12 000. Dividends Piet received dividends to the amount of R5 000 during the 2017 year of assessment in respect of shares which he still holds in South African listed companies, incorporated in terms of the South African Companies Act. Suggested solution In terms of section 9(2)(a), any dividend received by a person, excluding a foreign dividend (as defined), is from a source within the Republic. The R5 000 is therefore from a source within the Republic and must be included in Piet's gross income. The dividends are, however, fully exempt in terms of section 10(1)(k)(i) and therefore Rnil will remain in Piet's income. Services rendered (1) During the 2017 year of assessment, the South African government appointed Piet in terms of a service contract to conduct research abroad. He received R15 000 as remuneration for his research. Piet is also taxed on the R15 000 in the country where he is now resident. Suggested solution In terms of section 9(2)(h) any amount received in respect of services rendered on behalf of an employer which is a government entity (public sector) is from a source within the Republic. The R15 000 is therefore from a source within the Republic and will be included in Piet's gross income. As Piet is already being taxed on the R15 000 in another country, it is exempt in terms of section 10(1)(p). Therefore, Rnil will remain in income. The dividend will be subjected to dividends tax (we will deal with this in TL105).

28 TAX4861/104

Services rendered (2) During the 2017 year of assessment Piet also entered into an agreement with a South African company in terms of which he does contract work for them in the Republic from time to time. Assume that according to the relevant DTA, Piet is not taxed on this remuneration in the country in which he is now resident. Suggested solution As there is no specific source rule in section 9 of the Act, case law applies. The work is physically done in the Republic, so the true source of the remuneration is where the services were rendered, i.e. the Republic. It will therefore be included in his gross income and consequently in his income. Rental income Piet still owns a furnished flat in Hout Bay, which he lets to tenants. He receives R15 000 rental per month, R10 000 of which is for the flat and R5 000 for the furniture. Suggested solution As there is no specific source rule in section 9 of the Act, case law applies. The flat is located in the RSA, so the R10 000 rental income is from a source within the Republic and should be included in his gross income. The R5 000 rental income for the furniture (i.e. movable assets) will also be from a source within the Republic as the letting operations are located in the RSA. Therefore the full R15 000 per month will have to be included in gross income. Interest received During the 2017 year of assessment, Piet made an ad hoc loan to one of his old friends. The credit was granted overseas and the friend (who is ordinarily resident in the Republic) utilised the funds in the RSA. Piet received R30 000 interest in respect of the loan during the 2017 year of assessment. Suggested solution In terms of section 9(2)(b) interest is received from a source within the Republic if the debtor is a resident OR if the funds are utilised in the Republic. Therefore, the interest is received from a source within the Republic and needs to be included in Piet's gross income. The interest accrued to Piet will be liable for 15% withholding tax on interest in terms of section 50B(1) if he does not qualify for a section 50D(1) exemption. As his friend does not qualify as a banking institution nor a listed financial institution, withholding tax will apply – refer to SILKE 5.4.2. All amounts subject to withholding tax on interest are exempt in terms of section 10(1)(h). If the amount were not subject to withholding tax (for example it was received from a bank), Piet could not qualify for the section 10(1)(h) exemption, but could still qualify for a section 10(1)(i) exemption. To qualify for the section 10(1)(h) exemption he should not have been physically present in the Republic for a period exceeding 183 days in aggregate in the 12-month period preceding the date on which the interest is received by him and the debt from which the interest arises is not connected to a permanent establishment of him in the Republic. Even though Piet's letting activities are regarded as a trade, as defined, the extent of letting out one flat will not be regarded as "the carrying on of a business through a permanent establishment". He is also not a moneylender. In other words, he is not carrying on a business in a permanent establishment in the Republic. The interest income of R30 000 will therefore be exempt in full in terms of section 10(1)(h) so that no amount will be included in income as defined.

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Pension received When Piet was 50 years old, he retired from the services of his South African employer where he had been working for many years. He emigrated immediately afterwards. He has been receiving a monthly pension of R18 000 from this previous employer from 1 March 2016. Suggested solution In terms of section 9(2)(i), a pension is from a source within the Republic if the services were rendered in the Republic. This being the case, Piet will have to include the pension received in his gross income. The R216 000 (R18 000 x 12 months) will therefore be included in his gross income.

Example 2 – Pensions

Mr E worked abroad for a foreign company for 15 years. Thereafter he worked in the RSA for the foreign company for 18 years, after which he retired on 29 February 2016. He has been receiving a monthly pension of R18 000 (from 1 March 2016) from the foreign pension fund, of which he became a member when he started working for the foreign company. Assume that no DTA is applicable. REQUIRED: Calculate which amount (if any) must be included in Mr E's gross income for the 2017 year of assessment and which exemptions (if any) he is entitled to if (a) he is a resident (b) he is a non-resident and receives a pension amount from a South African fund (ignore any DTA)

Suggested solution

(a) Resident R

Gross income (R18 000 x 12 months) (Note) Less: Exemption - section 10(1)(gC)(ii) (15/(15 + 18) x R216 000) Income

216 000 (98 182) 117 818

Note: In terms of the definition of gross income, Mr E must include his worldwide receipts and accruals in gross income, but 15/33 x R216 000 is regarded not to be from a source within the Republic and is therefore subject to the section 10(1)(gC) exemption.

(b) Non-resident R

Gross income in terms of s 9(2)(i) (18/(15 + 18) x R216 000) - Note Less: Exemptions Income

117 818 nil 117 818

Note : In terms of section 9(2)(i) and section 9(3)(a), the pro rata portion of a pension received connected to the number of years of services rendered within the Republic is from a source within the Republic. Therefore 18/(15 + 18) x R216 000 = R117 818 of the pension received is from a source within the Republic and needs to be included in the gross income of Mr E.

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5.6.2 Withholding taxes applicable to income received by non-residents

Read the relevant sections in the Act as indicated in the table below.

Work through SILKE (as indicated below) together with the summary provided in par 5.6.3 below.

Work through example 5.5 in SILKE as well as the additional examples provided below.

Section SILKE Application Level

35A 5.4.1 Withholding tax on payments in respect of the disposal of im-movable property in South Africa

3

47A – 47K 5.4.1 Final withholding tax on foreign entertainers and sportspersons

excluded

49A – 49H 5.4.1 Final withholding tax on royalties and the imparting of STIC knowledge

excluded

50A – 50D 5.4.1 Final withholding tax on interest earned by a foreign person that is not a controlled foreign company

3

50E – 50H 5.4.1 Final withholding tax on interest earned by a foreign person that is not a controlled foreign company

excluded

64D – 64N Dividends tax - later TL105

If royalties are the only Republic income earned by the non-resident, that person does not have to register as a taxpayer in the Republic.

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5.6.3 Summary of income received by non-residents and applicable withholding taxes (grey-highlighted sections in italics are excluded)

Receipt or accrual by non-resident

Gross income inclusion

Exemption Withholding tax

Summary SILKE

Interest received (from the Republic)

s 9(2)(b) s 10(1)(h) or (i)

s 50A – 50D (50E - 50H excluded)

Applies to interest received on or after 1 March 2015

Will be subject to a 15% final withholding tax in terms of s 50B(1), except if - it specifically qualifies for exemption from

withholding tax in terms of s 50D(1)(a) – (d) (i.e. for example interest received from the government, a bank); or

- it specifically qualifies for exemption from withholding tax in terms of s 50D(3), that is, if the person was physically present in the Republic more than 183 days in total during 12 months preceding the date of receipt; or if the debt claim in respect of which the interest is paid is effectively connected to a permanent establishment of a foreign person in the Republic – meaning s 10(1)(h) will not apply

If the interest amount fulfils the requirements of section 10(1)(h), the gross amount will be exempt from gross income, that is, if the person is not physically present in the Republic more than 183 days in total during 12 months preceding the date of receipt, or if the debt claim in respect of which the interest is paid is not effectively connected to a permanent establishment of a foreign person in the Republic.

If it is not exempt in terms of s 10(1)(h), then it is subject to s 10(1)(i).

The s 10(1)(i) exemption is only available to natural persons, whereas the s 10(1)(h) exemption is available to all qualifying persons, including companies.

5.4.2 6.17.1 6.17.2

Foreign interest received Not gross income

- - - -

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Summary SILKE

Dividend received (from the Republic)

s 9(2)(a) s 10(1)(k)(i) s 64D – 64N Full exemption in terms of s 10(1)(k)(i), but subject to15% final dividends tax.

Exempt from dividends tax if the company paying the dividend is a non-resident and it is paid in terms of a listed share (dual listing).

5.3.1 6.9 TL105

Foreign dividend received Not gross income

- -

Royalties and payments for STIC knowledge

s 9(2)(c) – (f) s 10(1)(l) s 49A – 49H Will be subject to a final withholding tax of 15% in terms of section 49B(ii), except if it qualifies for the exemption from withholding tax in terms of section 49D(a), that is, if the person was physically present in the Republic more than 183 days in total during 12 months preceding the date of receipt; or carried on business through a permanent establishment in the Republic at any time during the 12 months preceding the date of receipt.

If the royalty amount has been subject to section 49B and the requirements of section 10(1)(l) have been fulfilled, the gross amount will be exempt in terms of section 10(1)(l), that is, if the person was not physically present in the Republic more than 183 days in total during 12 months preceding the date of receipt; or did not carry on business through a permanent establishment in the Republic at any time during the 12 months preceding the date of receipt.

5.3.1 5.4.2 6.10

Authors (copyright) s 9(2)(c) & (d) 5.3.1

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Summary SILKE

Holding of public office/services rendered for employer who is a government entity

s 9(2)(g) & (h) s 10(1)(p) - Amount received for services rendered outside the Republic for an employer in the national, provincial or local sphere of government, if that amount is chargeable with income tax in that country.

5.3.1 6.18.8

Pensions or annuities s 9(2)(i) & 9(3)(a)

- Employees' tax

Only the portion which relates to years of services rendered in the Republic is from a source in the Republic and consequently gross income.

5.3.1 5.4.5

Capital gain – immovable property

s 9(2)(j) & s 26A Not exempt s 35A The purchaser of the immovable property of a foreign owner must withhold tax in respect of the disposal at either 5% (seller is natural person), 7,5% (seller is a company) or 10% (seller is a trust), if the purchase price is more than R2 million.

This is not a final withholding tax, but only a pre-payment of any tax liability which may arise from the disposal of the fixed property.

5.3.1 5.4.2 5.4.6

Capital gain – movable property

s 9(2)(k) & s 26A

Not exempt - 5.3.1 5.4.6

Exchange differences

s 9(2)(l) - - 5.3.1

Recoupments in terms of section 8(4)

Par (n) of gross income

definition

- -

Other income: contractual annuity, purchased annuity, rental income – fixed property, rental income – movable property, business income

Case law - - 5.3.2

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5.6.4 Summary of taxes applicable to non-residents

The tax The application

Value-Added Tax Act No distinction between residents and non-residents. If an enterprise is carried on in the Republic, then the taxpayer must register for VAT if all the requirements are met.

Estate Duty Act Applicable to a person ordinarily resident in the Republic on worldwide assets.

Applicable to persons not ordinarily resident in the Republic on assets situated in the Republic.

Income Tax Act Normal tax (excluding section 26A - taxable capital gains)

Applicable to a resident on worldwide gross income.

Applicable to non-residents only on gross income from a source within the Republic.

Income Tax Act (Eighth Schedule) Determination of taxable capital gain and assessed capital losses

Applicable to a resident on worldwide assets.

Only applicable to non-residents on immovable property situated in the Republic and assets which are attributable to a permanent establishment of that person in the Republic through which the non-resident carries on business in the Republic.

Income Tax Act Donations tax (section 54 – 64)

Only applicable to a resident.

Income Tax Act

Withholding tax on non-resident sellers of immovable property

Withholding tax on interest received

Applicable in respect of the disposal of immovable property by non-residents.

Applicable to non-residents who receive interest. Exempt in terms of section 10(1)(l).

Income Tax Act Dividends tax on companies

Only applicable to a resident company and non-resident companies if it is a listed share (and not a dividend in specie).

Refer to TL105.

5.7 DOUBLE TAX AGREEMENTS (DTAS)

Read SILKE 19.5, 19.5.1 and 19.5.2 (DTA) as well as notes provided below.

SAICA level 3.

Refer to the DTAs between South Africa and Mauritius, Brazil, Netherlands and the United Kingdom respectively (the relevant extracts from these DTA’s are attached as Annexure A).

Double tax means that a taxpayer is subject to tax in two countries on the same income. Relief from double tax can take the form of either

unilateral relief, for example the section 6quat and 6quin rebate for foreign taxes paid by residents on income which has been subject to taxation in another country, or

bilateral relief, where a DTA between countries provides relief from double taxation. In terms of section 108(1) of the Act, the National Executive may enter into an agreement with the government of any other country, whereby arrangements are made with that government to prevent, mitigate or discontinue levying, under the laws of the Republic and of the other country, of tax for the same income, profits or gains; or tax imposed on the same donation; or to render reciprocal assistance in the administration and collection of taxes under the laws of the Republic and that other country.

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A double tax agreement takes precedence over the Republic's tax rules. We must therefore either state the rules of the DTA (thus provide you with the relevant extract of the DTA in the question) or tell you to ignore any possible existence of a DTA in questions.

Special regard must be had to the following terms in the DTAs: - Resident - Place of effective management - Immovable property - Employment/ dependant services - Dividends and - Pensions

Example

Amy is 40 years old and works in Saudi Arabia as a contractor. She commenced as a contractor in Saudi Arabia in 2014 with an initial contract for a two-year period renewable every two years. She has renewed and extended her contract for the period 2016-2017. Housing is provided by the employer. Every time she extends her contract, she has to obtain a work permit through the Department of Foreign Affairs in the Republic. She is single and does not own any fixed property. She visits her parents, who live in South Africa, twice a year during April and December for a total period of three weeks at each visit. Amy travels on her South African passport. She does not possess any other passport. Her monthly income is $2 800 (R28 000 per month). She is a member of a South African medical aid fund and pays a monthly contribution of R750 to the fund. The tax rate applicable to individuals in Saudi Arabia is 0%. Assume that there is no DTA between the two governments in place. Amy wants to donate R175 000 to her elderly parents to assist them in buying a house in a retirement village in South Africa. She can either give them the cash or her parents can register a mortgage bond over the property. She would then repay the bond. She also wants to donate R100 000 to her 5-year-old niece who lives in South Africa and R25 000 to her 22-year-old cousin living in the United Kingdom. Amy is uncertain about whether she will still be regarded as ordinarily resident in the Republic.

REQUIRED:

(a) Discuss (with reference to case law) whether Amy will be regarded as ordinarily resident in the Republic in terms of the definition of resident in the Act. (You do not have to discuss the physical presence test.)

(b) Advise Amy on her South African normal tax position for the 2017 year of assessment. (Assume that she will be regarded as a resident and that there are no DTAs.)

(c) Discuss the donations tax implications (assume that Amy is a resident).

(d) Advise Amy how she can minimise her donations tax liability.

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Suggested solution (a) Amy is a resident because she is ordinarily resident in the Republic. "Ordinarily resident" is not

defined but the courts consider various factors in deciding whether a taxpayer is ordinarily resident in the Republic or not.

In Cohen v CIR the principle was laid down that a person may be resident in more than one country at a time but the person can only be ordinarily resident in one country. Ordinary residence is the residence in the country to which a person would naturally and as a matter of course return from their wanderings. Their principle residence would be their real home. Physical absence during the whole year of assessment is not decisive in the question of ordinary residence.

CIR v Kuttel held that a person is ordinarily resident where they have their usual or principal residence, that is, what may be described as their real home.

The following circumstances indicate that Amy is ordinarily resident in the Republic:

She does not own property in either of the countries. It appears that her family resides in the Republic. She travels on a South African passport and does not possess any other passport. Her medical aid fund is in the Republic. She returns to her parents in South Africa during her vacations. If her contract expires, she will have to return to the Republic. The circumstances indicate that she regards her real home as the Republic and, therefore, she is ordinarily resident in the Republic.

(b) Amy is a South African resident and, in terms of the gross income definition, she has to include her

worldwide income of R336 000 in gross income. Section 10(1)(o)(ii) exempts remuneration (type of remuneration is specified in this subsection) derived by a person in respect of services rendered outside the Republic for or on behalf of any employer if the person concerned was outside the Republic

for more than 183 complete days in aggregate during any 12-month period commencing or ending during any year of assessment; and

for a continuous period of absence exceeding 60 full days during the relevant period of 12 months; and

the services were rendered during that period for or on behalf of an employer, who can be situated in or outside South Africa.

The R336 000 will be exempt and her South African income tax liability will be Rnil.

(c) Amy is a South African resident and is liable for donations tax. In terms of section 56(2)(c),

donations tax “shall not be payable in respect of so much of any bona fide contribution made by the donor towards the maintenance of any person as the Commissioner considers to be reasonable (not subject to objection or appeal)”.

Amy donates R175 000 to her parents to assist them in buying a house in a retirement village. One can argue that this amount is not a contribution to maintenance but rather assistance to her parents to obtain an asset.

Amy will pay donations tax of 20% on the value of property donated in excess of R100 000 during any year of assessment.

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She will be liable for donations tax on all the donations made to her parents, niece and cousin.

R Parents 175 000 Niece 100 000 Cousin 25 000

Total 300 000 Less: Exemption (s 56(2)(b)) (100 000)

Amount subject to donations tax

200 000

Donations tax liability

@ 20% 40 000

(d) Amy should rather contribute on a monthly basis to her parents' maintenance. This amount would be

exempt in terms of section 56(2)(c). She should rather split the donation to her niece and cousin over two years with payments in February 2016 and March 2017. The payment to the niece in February 2016 should be for the amount of R100 000. In the next year of assessment she can donate the R25 000 to her cousin.

In the 2017 year of assessment the donations tax will then be Rnil (R100 000 less R100 000) and in 2018 the donations tax payable would be Rnil (R25 000 less R100 000).

____________________________________ END OF LEARNING UNIT 5

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A total of 2 hours of your study time (Day 3) of this week has been allocated to learning unit 6. The following time allocation is recommended:

Background 3 minutes

Study approach 7 minutes

General deduction formula and prohibited deductions 110 minutes

Total 120 minutes

6.1 BACKGROUND Learning unit 6 deals with General deduction formula and prohibited deductions. The topics covered in this learning unit fit into the tax framework as follows: TAX FRAMEWORK

GROSS INCOME (section 1)

LESS: Exempt income (sections 10, 10A, 10B and 10C)

= INCOME

LESS: Deductions and allowances (mainly sections 11(a) –17A, 21 – 24P, excluding s 18A)

LESS: Assessed loss brought forward (section 20)

ADD: Amounts to be included in taxable income including TAXABLE CAPITAL GAINS

LESS: Qualifying donations (section 18A)

= TAXABLE INCOME

Use taxable income to calculate NORMAL TAX PAYABLE.

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After studying learning unit 6, you should be able to meet all the outcomes listed at the beginning of chapter 7 (General deductions) of SILKE.



There are no amendments to the Act that are proposed in the Taxation Laws Amendment Bill of 2016 or the Rates and Monetary Amounts and Amendment of Revenue Laws Bill of 2016 relevant to learning unit 6.

Before you start studying the detail provisions of the general deduction formula, first read the following scenario relating to the Beancounter family. You should then, as you study the different income tax provisions, identify areas of concern that should be brought to the attention of the Beancounter family. Refer back to TL101/2017, TL103/2017 and LU 4 of this tutorial letter for background information.

6.4. BEANCOUNTER SCENARIO By now you know that Bizzie Beancounter has decided to start her own business venture, which will be carried out in her own name. She has located the perfect business premises, available for letting, where she intends to start a dry-cleaning business (recognised as a process of manufacture by the Commissioner). Bizzie has decided to call her new business "Bizzie-as-a-bee Cleaners”.

Bizzie intended to open the doors of her new business on 1 March 2016 (with the financial year ending 28/29 February each year). Because of an unforeseen delay in obtaining an overdraft facility from her bank, trading only commenced on 15 May 2016. Bizzie has registered as a vendor for VAT purposes in her own name, as the estimated total value of taxable supplies will exceed R1 000 000 in the first 12 months based on fixed contractual agreements.

Bizzie is concerned about whether the expenses she has incurred so far will be deductible for Income Tax purposes, especially because of the late commencement of the trading activities. She has asked you for advice.

Before attempting to help Bizzie with her query, you should work through and master LU 6. After studying the general deduction formula in section 11(a) read with section 23(g) of the Act, you will be ready to identify areas of concern that should be brought to the attention of the Beancounter family.

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6.5. STUDY APPROACH We will guide you through the learning unit. We recommend the following study approach:

Step 1: Read the relevant section in the Act. (You will probably still be able to grasp the essence of

a section without looking at this Act, but we urge you to become familiar with it. This will be to your benefit in tests, the final examination and the 2018 ITC, which are all limited open-book examinations.)

Step 2: Review (study) the relevant paragraph(s) in SILKE together with any discussion of the relevant section included in this tutorial letter. Read the additional information first before working through the relevant paragraph(s) in SILKE. While studying this unit, also refer to the relevant court cases on the general deduction formula (see summary table of case law below, as well as TL102/2017). As the allocated time is limited, you will require additional reading time for the case law. You only have to study the relevant case law in TL102/2017. Therefore, you may ignore the court cases (which will be highlighted in grey in the textbook) mentioned in SILKE which are not dealt with in TL102/2017.

Note that marks will be awarded in the exam for stating the correct principles of important

cases. In light of the fact that you have to set aside additional time to study the case law, we have included a list of your prescribed cases (see under 6.6 below) - highlighting those tax principles that emerged from or were considered by the courts and that are important for your study purposes. Note that it is not an exhaustive list of established principles and merely provides an indication of the relevant part(s) of the tax legislation considered and principles considered/established in the respective cases. It should therefore be used merely as an aid in guiding you to a better understanding when reading the case law and applying the relevant principle(s) of particular cases to a particular set of facts.

6.6 THE GENERAL DEDUCTION FORMULA (section 11(a) and section 23)

The following table provides a summary of the sections of the Act that are covered in this learning unit.

In order to provide you with an overview of the general deduction formula we include a table, which refers to SILKE, your prescribed textbook, as well as to the applicable sections in the Act. Although this table provides you with a summary of the sections in the Act and the appropriate references to SILKE that is covered in this learning unit, it should not be used in isolation to guide you through the study process.

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Reference to the Act

Reference to SILKE Topics SAICA

LEVEL

Section 11(a) 7.1 – 7.3 (excluding 7.3.2.1 and 7.3.2.2)

The general deduction formula 3

Section 23 Section 23(p) and 23(r) Section 23(n)

7.5.1 – 7.5.9, 7.5.11, 7.5.14 7.5.16, 7.8

7.5.15, 7.5.17

Deductions not allowed in determination of taxable income

3

3

excluded

When working through SILKE, chapter 7, you can ignore the following paragraphs, as they are either excluded from the SAICA syllabus, or dealt with in another learning unit:

SILKE chapter 7.3.2.1 (covered in learning unit 12)

SILKE chapter 7.3.2.2 (excluded)

SILKE chapter 7.5.10 (covered in learning unit 8 of TL105/2017)

SILKE chapter 7.5.12 (will be covered in tutorial letter 107/2017)

SILKE chapter 7.5.13 (excluded)

SILKE chapter 7.7 (excluded)

The general deduction formula is contained in section 11(a) read with section 23(g). Section 11(a) contains the positive criteria and section 23(g) the negative criteria. Section 11(a) provides for a deduction of:

expenditure and losses

actually incurred (means paid or there must be an unconditional liability to pay)

during the year of assessment (the courts established that it is a silent requirement (meaning that section 11(a) does not specifically require it))

in the production of income (means that the act that gave rise to the expenditure is closely connected to the income-earning activities),

provided such expenditure and losses are not of a capital nature (means that the expenditure/ loss is more closely related to the income-earning operations than to the income-earning structure, it does not form part of fixed capital but rather floating capital (trading stock), or it did not create an enduring benefit).

The diagram below shows the treatment of expenditure and losses in terms of section 11(a) and 23 once their nature has been determined:

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Section 23(o) – Interpretation Note: No 54: Deductions – Corrupt activities, fines and penalties (see the Student Handbook)

Interpretation Note: No. 54 was issued on 26 February 2010 and examines the meaning and scope of section 23(o). Section 23(o) prohibits the deduction for income tax purposes of expenditure incurred in respect of:

corruption or a corrupt activity; or

a fine or penalty imposed as a result of an unlawful activity.

In other words, corrupt payments such as bribes, fines and penalties for unlawful activi-ties are not tax deductible. However, the deduction of bona fide commercial penalties is not affected by the provisions of section 23(o). The deduction of such commercial penalties must be considered in terms of the general deduction formula.

Expenditure and losses

Revenue nature

General deduction formula and section 23

Deduction for normal tax purposes

No CGT effect

Capital nature

Special deductions and

allowances section 23

Deduction or allowance for

normal tax purposes

Reduces base cost of asset

Base cost of capital asset

No deduction for normal tax purposes

Forms part of base cost for

CGT purposes

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General deduction formula: SUMMARY OF CASE LAW

This table contains a brief summary of the cases prescribed by SAICA. For a detailed summary and proper discussion of these cases, refer to TL102. Also, for the remainder of the cases, i.e. the cases not relevant to the topics covered in this tutorial letter, as well as the “teaching aid” cases, also refer to TL102.

Name of court case

Relevant to Principle established / considered

Sub-Nigel Ltd v CIR

Deductions – section 11(a), whether income must be earned in the same year of the incurral of the expenditure

In order for the expenditure to have been incurred “in the production of income”, it is not required that the expenditure must have produced income in the same year that the expenditure was incurred – as long as the expenditure has been laid out for the purpose of producing income.

Burgess v CIR

Deductions – section 11(a), “carrying on of a trade”

The definition of “trade” in sec 1 of the Act should be given a wide interpretation and the definition is not necessarily exhaustive.

Edgars Stores Ltd v CIR

Deductions – section 11(a), “actually incurred”

Expenditure is actually incurred in a year of assessment only if there is an unconditional legal obligation to incur the expenditure in that year.

Nasionale Pers Bpk v KBI


If the liability is conditional in any way (resolutive or sus-pensive), or contingent rather than actual, there was no expenditure actually incurred.

CIR v Golden Dumps (Pty) Ltd


If the outcome of a legal dispute is unresolved at year-end, it cannot be said that a liability has been actually incurred.

C:SARS v Labat Africa Ltd (2011 SCA)


The SCA overturned the judgement of the court a quo and held that an allotment or issuing of shares does not involve a shift of assets of the company even though it might, but not necessarily, dilute or reduce the value of the shares in the hands of the existing shareholders and it can therefore not qualify as an expenditure.

Port Elizabeth Electric Tramway Co Ltd v CIR

Deductions – section 11(a), “in the production of income”

Established the so-called “close connection” test. The test is twofold, namely an enquiry to:

whether the purpose of the expenditure is to produce income (regardless of whether such expenses are ne-cessary for the performance of the business operation or attached to it by chance or are bona fide incurred for the more efficient performance of such operation) and, if so;

whether the expenditure is so closely connected with the income earned that it may be regarded as part of the cost of performing it.

Joffe & Co (Pty) Ltd v CIR


In this case the “close connection” test was referred to as the “inevitable concomitant” test. The court held that the expenditure in question had not been incurred for the pur-pose of earning profits and it had not been established that negligent construction was a necessary concomitant of the trading operations of a reinforced concrete engineer.

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Name of court case


C SARS v BP South Africa (Pty) Ptd


Confirmed the principle that the purpose of the expenditure must be looked at to determine whether such expenditure produces income as defined.

Provider v COT Deductions – section 11(a), “in the production of income”

Payments made by the taxpayer to induce its employees to enter and remain in its service, were held to constitute expenditure actually incurred in the production of income and could thus be validly deducted.

CSARS v Mobile Telephone Networks Holdings (Pty) Ltd


This case concerned the deduction of audit fees paid by the taxpayer and whether the audit fees were expenditure incurred in the production of income, since the taxpayer earned both taxable interest income and exempt dividend income.

(The second issue before the court concerned the deduction of a professional fee paid for the (inter alia) implementation of a new accounting computer system – refer to TL102 for details.)

In deciding on whether the audit fees were incurred in the production of income, the court looked at the purpose of the expenditure and what it actually affects (the “closeness of the connection”, i.e. the so-called “close connection” test). It was held that where expenditure is laid out for a dual or mixed purpose, an apportionment of such expenditure is in principle approved. That apportionment is essentially a question of fact depending upon the particular circumstances of each case. The apportionment must be fair and reasonable.

New State Areas Ltd v CIR

Deductions – section 11(a), “not of a capital nature”

Main test used by the court in this case was the so-called “operations v structure” test, i.e. whether the expenditure should properly be regarded as part of the cost of performing the income-earning operations or as part of the cost of establishing or improving or adding to the income-earning structure.

The other tests that were considered by the court were the “fixed v floating capital” test and the “enduring benefit” test. Note that there is usually no “one test” that will cover all circumstances and usually a combination of tests will lead to a correct decision.

Rand Mines (Mining & Services) Ltd v CIR


The “operations v structure” test as well as the “enduring benefit” test was applied.

The court found that in each case close attention has to be given to its particular facts.

It was held that the expenditure incurred in acquiring a con-tract to manage a mine was capital in nature, because it was a cost expended to acquire an income-earning right or structure.

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Name of court case


BPSA (Pty) Ltd v CSARS [2007] SCA 7 (RSA)


In considering the issue whether certain royalty payments were capital or revenue in nature, the court applied the “enduring benefit” test. It was held that the expenditure in issue neither created nor preserved a capital asset in the hands of the taxpayer which, whilst not in itself conclusive, was indeed a consideration of considerable importance.

When no new asset has been created for the enduring benefit of the taxpayer, the expenditure naturally tends to assume more of a revenue character.

CIR v Nemojim (Pty) Ltd

Deductions – section 11(a), dual purpose

Established the principle of apportionment in the case where expenditure was incurred for a dual purpose (i.e. partly for the purpose of producing “income” as defined and partly for producing exempt income).

Warner Lambert SA (Pty) Ltd v C SARS

Deductions – section 11(a) read with sec 23(g)

The issue was whether social responsibility expenditure, which a taxpayer was by United States legislation obliged to incur in South Africa (compliance with the Sullivan code), was expenditure laid out for the purposes of trade and, if so, whether it was of a capital or a revenue nature.

It was held that Sullivan Code expenses were bona fide incurred for the performance of the taxpayer’s income-producing operation and formed part of the cost of performing it and, therefore, the social responsibility expenditure had been incurred for the purpose of trade. Further, the social responsibility expenses incurred by the taxpayer were not of a capital nature in that there was no question here of the creation or improvement of a capital asset in the taxpayer’s hands and the taxpayer’s income earning structure had been erected long ago.

C:SARS v Scribante Construction (Pty) Ltd

Deductions – section 11(a) read with sec 23(g)

The taxpayer company declared dividends by crediting its holders of shares’ loan accounts. It was held that the only purpose of paying interest on the loan accounts was to secure for the company the benefit of the continued availability of the funds for use in its trading activities. In addition, borrowing money and re-lending it at a higher rate of interest, thereby making a profit, constitutes the carrying on of a trade.

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Be aware of the difference between the tests for establishing whether an item of expenditure is incurred “in the production of income” and whether that expenditure is “capital or revenue in nature”. THE TESTS ARE DIFFERENT. The tests used to establish whether gross income is capital or revenue in nature are also completely different to the tests used to establish whether expenditure is capital or revenue in nature. The table below provides a list of the different tests established by the courts in determining the capital/revenue nature of gross income versus expenditure.

Gross income – “capital/revenue” tests Expenditure – “capital/revenue” tests

“tree and fruit” principle

intention (most important test)

(subjective factor) - mere realisation of

capital asset or pursuance of profit-

making scheme

change in intention (“crossing the

Rubicon”)

mixed intentions – main/dominant

intention

alternative intentions - revenue

objective factors (revise SILKE

chapter 3.2.2)

fixed v floating capital

closeness of the connection to the

income-earning operations or income-

earning structure (the ‘operating v

structure’ test)

fixed v floating capital

“once and for all” expenditure

“enduring benefit” test

the nature of the transaction

the nature of the business carried on

6.7 OUTCOMES FOR THE BEANCOUNTER SCENARIO

You have studied LU 6 and should now be able to answer Bizzie Beancounter’s queries. Read through the Beancounter scenario again and make a rough summary of what your solution would be. You need not provide detailed references to specific sections, but rather just a list of all the different provisions which will have an effect on Bizzie Beancounter’s queries.

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In formulating your answer you should have identified the following:

Remember, as Bizzie is running the dry-cleaning business as a sole trader, she will pay tax on the business’s taxable income in her own name. Bizze’s year of assessment runs from 1 March 2016 to 28 February 2017.

Bizzie commenced her trading activities on 15 May 2016. A dry-cleaning business is a “trade” as defined, therefore she will be allowed to deduct all allowable expenses (excluding VAT) incurred from this date onwards, from the income derived out of the business. These deductions are allowed in terms of either the general deduction formula (e.g. rental paid, water and electricity, salaries, interest paid) or specific deductions provided for in the Act (e.g. bad debt, key-man policies etc. – dealt with in TL106).

Expenses incurred prior to 15 May 2016 in preparation of the carrying on of her dry-cleaning busi-ness, can be deducted in terms of section 11A (dealt with in TL106) in the year of assessment in which she commences trading (being her 2017 tax year), provided such expenses would have been deductible had they been incurred after trading commenced. The section 11A deduction is, however, limited to the trade income after deducting any amounts deductible in that year of assessment in terms of any other provisions of the Act. The excess deductions may be carried forward for possible deduction in the next year of assessment against income from the dry-cleaning business.

After completion of the above learning unit, please use the outcomes provided in note 6.2 of this learning unit to identify areas for improvement. If you have met all the outcomes stated, you have finished your studies of the general deduction formula and prohibited deductions and will continue your studies with capital gains tax (learning unit 7).

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DAY 3 and 4 – WORK PLAN FOR 24 and 25 FEBRUARY 2017

The remaining hour of day 3 and the entire day 4 of your study time are allocated to learning unit 7. The following time allocation for days 3 – 4 is recommended:

Taxable capital gains and assessed capital losses Minutes

Day 3 – 24 February 2017 – 1 hour

7.1 Background 5



7.4 Beancounter scenario 10

7.5 Part I and II of the Eighth Schedule (par 1 – 10) 35

Day 4 – 25 February 2017 – 5.75 hours (part 1)

7.5.1 Interaction between the normal tax framework and CGT 15

7.6 Part III of the Eighth Schedule – disposal of assets (par 11 – 14) 90

7.7 Part V of the Eighth Schedule – base cost (par 20 – 34) 90

7.8 Part VI of the Eighth Schedule – proceeds (par 35 – 43A) 40

7.9 Part IV of the Eighth Schedule – limitation of losses (par 15, 53 and 56) 20

7.10 Part VIII of the Eighth Schedule – other exclusions (par 52 – 64B) 30

7.11 Part VII of the Eighth Schedule – primary residence exclusion (par 44 – 51A)

30

7.12 Part IX of the Eighth Schedule – roll-overs (par 65 – 67D) 10

7.13 Parts dealt with in later tutorial letters

7.14 Outcomes of the Beancounter scenario 20

Total (6.75 hours) 405

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7.1 BACKGROUND The so-called capital gains tax is not a separate tax. Reference to "capital gains tax (CGT)" in textbooks and notes (also in these notes) is for practical purposes. Refer to CGT in the context of the Eighth Schedule of the Act. A taxable capital gain will first be determined in terms of the rules of the Eighth Schedule to the Income Tax Act. It will be included in the calculation of normal tax of a person through section 26A. A taxable capital gain is taxed and an assessed capital loss ring-fenced. Ring-fencing means that losses are limited to the capital gains. The balance of the capital loss will be carried forward to the following year of assessment to be set off against the aggregate capital gain of that year of assessment. Thus, an assessed capital loss will not be included in the calculation of taxable income. CGT became effective from 1 October 2001 and deals with the disposal of assets on or after the valua-tion date (the value of an asset on 1 October 2001), irrespective of whether the asset had been acquired before or after this date. The date of disposal (and not the date of acquisition) will thus determine whether the proceeds on the disposal of the relevant asset are subject to CGT. If an asset was disposed of on or after 1 October 2001, only such portion of the capital gain or capital loss that relates to the period of holding the asset after this date will be taken into account for CGT purposes. This effectively means that the portion relating to the holding period before the valuation date will be ignored in calculating the capital gain or capital loss. The Eighth Schedule determines that if, by definition, there was a disposal of an asset, an event has occurred for CGT purposes. To determine the amount of the capital gain or loss, the base cost will be subtracted from the proceeds. From the wording of the above paragraph, four key definitions contained in the Eighth Schedule can be identified and these definitions form the basic building blocks for the determination of a capital gain or capital loss of a taxpayer:

asset

disposal

proceeds

base cost Remember the normal tax framework, which was provided to you in previous learning units. Use this framework again and note WHERE the calculated taxable capital gain should fit into your calculation of the taxable income of a person. The normal tax framework for calculating taxable income

GROSS INCOME (defined in section 1) LESS: Exempt income (section 10, 10A, 10B and 10C) INCOME (defined in section 1) LESS: Deductions ADD: Amounts to be included in taxable income including TAXABLE CAPITAL GAIN LESS: Qualifying donations (section 18A) = TAXABLE INCOME (defined in section 1)

Various definitions in the Eighth Schedule must be used to determine the assessed capital loss or the taxable capital gain. The stage of the calculation and where the taxable capital gain fits into the normal tax framework is shown in the CGT process flow chart in SILKE 28.5.

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After Learning unit 7, you should be able to meet all the outcomes listed at the beginning of chapter 28 of SILKE (Capital gains tax (CGT)). The second last outcome relates to estate duty which is dealt with only in TAX4862. In addition to the above outcomes, add the following outcomes:

a well-rounded and systematic knowledge base of the four key elements of a CGT event, namely disposal (including deemed disposals), asset, proceeds and base cost

a well-rounded and systematic knowledge of exclusions, limitation of losses and roll-overs applicable to the CGT calculation as well as a detailed knowledge of all SAICA level 3 areas



Before continuing with learning unit 7, take note of the following proposed amendments to the Act, which are contained in the Taxation Laws Amendment Bill of 2016: and the Rates and Monetary Amounts and Amendment of Revenue Laws Bill of 2016.


Par 38 of the 8th Schedule

Paragraph 38 deems the disposal of an asset between connected persons either by way of donation or where the consideration is not at an arm’s length price, to be at market value. Certain disposals are excluded under par 38(2) from the deeming provisions of par 38. Par 38(2)(f) has been added which excludes the disposal of any land from the date on which that land becomes declared land as defined in section 37D(1) (land conservation in respect of nature reserves or national parks) (s 37D is excluded from your syllabus).


Paragraph 47 has been reworded and clarifies that the primary residence exclusion of par 45(1)(a) must apply only in respect of the portion of the capital gain or capital loss that is attributable to the period on or after valuation date (i.e. 1 October 2001) during which the person, beneficiary or spouse was so ordinarily resident.


Similar to the amendment in par 47, par 49 has been reworded and provides that par 45(1)(a) must apply only in respect of the portion of the capital gain or capital loss on the disposal of the primary residence that is attributable to any period on or after valuation date during which that person, beneficiary or spouse used that residence for domestic purposes as well as to the part used mainly for purposes other than the carrying on of a trade.

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Par 64A of the 8th Schedule

Any capital gain or capital loss in respect of the disposal that resulted in a person receiving restitution of a right to land, an award or compensation in terms of the Restitution of Land Rights Act, is disregarded. Par 64A(b) has been inserted to disregard a capital gain or capital loss in respect of a disposal by virtue of measures as contemplated in Chapter 6 of the National Development Plan: Vision 2030 (the “NDP”). Chapter 6 deals with the development of rural economic opportunities.

This amendment applies in respect of years of assessment ending on or after 29 February 2016.

Par 64D of the 8th Schedule

Par 64D has been inserted and disregards any capital gain or capital loss in respect of a donation of land or a right to land by the owner of the land by virtue of measures as contemplated in Chapter 6 of the NDP.

This amendment applies in respect of years of assessment ending on or after 29 February 2016.

Par 76B of the 8th Schedule

A proviso has been added to par 76B(1) and provides that where a return of capital is received in respect of a listed share, the market value of the listed share must be equal to the sum of:

(i) the ruling price of that share at the close of business on the last business day before the accrual of the return of capital or foreign return of capital; and

(ii) the amount of the return of capital or foreign return of capital.

Note: par 76B will be dealt with in TL105 under company distributions.

The following law amendments are proposed in the draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill of 24 February 2016:


Paragraph 5 has been amended by increasing the annual exclusion available to a natural person or special trust from R30 000 to R40 000.

The amendment is deemed to have come into operation on 1 March 2016 and applies in respect of years of assessment commencing on or after this date.


Paragraph 10 has been amended as follows:

(a) in the case of a natural person or a special trust the inclusion rate of taxable capital gains is increased from 33.3% to 40%, applying to years of assessment commencing on or after 1 March 2016.

(b) in the case of a company or trust the inclusion rate of taxable capital gains is increased from 66.6% to 80%, applying to years of assessment commencing on or after 1 March 2016.

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7.4 BEANCOUNTER SCENARIO Barry and Bizzie Beancounter (married in community of property) own a primary residence and Barry owns a beach cottage. He purchased the beach cottage from a third party on 10 March 2016 for R1.2 million. Barry donated the beach cottage to his son Soya (who immigrated to Spain in 2011) on 30 September 2016. He hopes that this will prompt Soya to come and visit more often. The market value of the beach house was R1 360 000 on 30 September 2016. On 30 September 2016 Barry and Bizzie sold their primary residence to the Butterbean testamentary trust at a market-related value. The primary residence (450 m2) was bought in November 1985 for the amount of R120 000 (inclusive of transfer duty). In June 2007 they extended the house by 195 m2 (at a cost of R600 000), to enable Barry to dabble in the design of a new clothing range. His business occupied 30% of the house. He declared his income from the clothing business in his income tax return of every year and also claimed his current costs as a business expense against his business income for tax purposes. No valuation for tax purposes was done on the house. On 30 September 2016, the market value of the house was R2.2 million. The sale will be funded with an interest-free loan account in both their names in the trust. Barry would like to know if there will be any donations tax payable or a possible taxable capital gain as result of the above transactions.

Before attempting to help Barry with his queries, work through and master learning unit 7. Only then will you be ready to identify areas of concern that should be brought to the attention of the Beancounter family.

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7.5 PARTS I AND II OF THE EIGHTH SCHEDULE

Read the applicable paragraphs in the Eighth Schedule to the Act as indicated in the table

below.

Work through SILKE (as indicated below) and any notes provided.

Legislation 8th Schedule

Reference to SILKE

Application Notes in

TL Level

par 1 28.1, 28.2, 28.4 & 28.6

Definitions and scope 7.5.1 3

par 2 28.3 Application (persons liable for CGT) 3

par 3 - 10 28.5 Capital gain, capital loss, annual exclusion, aggre-gate capital gain, aggregate capital loss, net capital gain, assessed capital loss, taxable capital gain

7.3 3

All examples in SILKE in chapter 28 are based on the assumption that the receipt or accrual is of a capital nature and therefore not gross income as defined.

7.5.1 Interaction between the normal tax framework and CGT We recommend that you interpret the interaction between the normal tax framework (the process of calculating taxable income) and the application of the Eighth Schedule as follows: The definition of asset

"Asset" is defined in paragraph 1 of the Eighth Schedule and includes – "property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum; and a right or interest of whatever nature to or in such property".

The definition of asset is wide and includes all assets, regardless of their nature (whether revenue or capital). For example, for tax purposes trading stock is revenue in nature but also an asset in terms of the Eighth Schedule. When trading stock is sold, the amount received will be gross income in terms of the definition in the Act, but also proceeds in terms of the definition in the Eighth Schedule. However, paragraph 35(3)(a) of the Eighth Schedule excludes all amounts that must be taken into account as gross income or in the calculation of taxable income before the inclusion of a taxable capital gain. Proceeds will thus have a nil value in the calculation of a capital gain or loss. The acquisition of trading stock is an allowable expense in terms of section 11(a) of the Act. In terms of paragraph 20 of the Eighth Schedule, the base cost of trading stock will be the cost of acquisition, BUT paragraph 20(3)(a) excludes expenditure allowed or allowable as a deduction in the calculation of taxable income before the inclusion of taxable capital gain from the CGT calculation. The base cost will have a Rnil value and there will be no capital gain or loss. The purpose is not to tax the same amount twice or to allow a double deduction. Although there might not be an actual disposal of an asset, there might be a deeming provision applicable, deeming an asset to be disposed of (paragraphs 12 and 12A of the Eighth Schedule respectively and section 9H of the Act). For example, when a capital asset becomes trading stock, a deemed disposal takes place (the asset has not actually been disposed of but its nature has changed (from being capital in nature to revenue in nature). A capital gain/loss therefore has to be calculated. At

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the same time, a deemed acquisition takes place (which will also be taken into account for the purposes of section 22 of the Act (the trading stock valuation section)).

Example: Trading stock

Facts: A taxpayer purchased trading stock worth R1 200 during the current year of assessment and sold it for R2 000. Result: An "event" has occurred for CGT purposes (disposal of an asset) and the provisions of the Eighth Schedule must be applied. At the same time, the amount received will be gross income in terms of the Act. Determination of taxable income R Sales (gross income definition) 2 000 Less: Purchases (section 11(a)) (1 200) Plus: Taxable capital gain (section 26A) – see calculation below nil

Taxable income 800

Calculation of taxable capital gain R R Proceeds nil

Selling price 2 000 Less: Reduced by amounts taken into account in the calculation of taxable income (gross income as defined) before the inclusion of taxable capital gain (par 35(3)(a))

(2 000)

Less: Base cost nil

Purchase price 1 200 Less: Reduced by amounts taken into account in the calculation of taxable income (s 11(a)) before the inclusion of taxable capital gain (par 20(3)(a))

(1 200)

Taxable capital gain nil

The complete CGT calculation regarding trading stock must always be provided in tests, examinations and the ITC, even though the answer is always Rnil taxable capital gain.

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Example: Recoupment of an asset

Facts: All amounts exclude VAT and paragraphs 65 and 66 of the Eighth Schedule (roll-over provisions) (refer to TL106) are not applicable. The cost price of a second-hand machine was R100 000. Section 12C allowances in terms of the Act (for the current and previous years of assessment) amounted to R40 000. The tax value is thus R60 000 (R100 000 – R40 000). The company sold the asset for R120 000. Result: An "event" has occurred for CGT purposes (disposal of an asset) and the provisions of the Eighth Schedule must be applied. At the same time, the amount received will be a recoupment in terms of section 8(4)(a) of the Act. So: The determination of taxable income R Recoupment (section 8(4)(a) (R100 000 – R60 000)) 40 000 Less: Section 12C allowance (for the current year of assessment (20% x R100 000)) (20 000) Plus: Taxable capital gain (in terms of section 26A (see – calculation below)) 16 000

Taxable income 36 000

Calculation of taxable capital gain R R Proceeds

Selling price 120 000 Less: Reduced by amounts taken into account in the calculation of taxable income before the inclusion of taxable capital gain (section 8(4)(a) in this example) Recoupment

(40 000)

80 000

Less: Base cost

Purchase price 100 000 Less: Reduced by amounts taken into account in the calculation of taxable income before the inclusion of taxable capital gain (section 12C: previous year R20 000 and R20 000 for current year)

(40 000)

60 000

Capital gain 20 000

Taxable capital gain (R20 000 x 80% inclusion rate for companies)

16 000

For each asset disposed of, a capital gain or loss is determined (calculated) separately during a year of assessment. A capital loss or gain is calculated by deducting the base cost of the asset from the proceeds of the asset. If the proceeds exceed the base cost, it will be a capital gain; if not (if the proceeds are less than the base cost), it will be a capital loss.

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A natural person and a special trust are entitled to an annual exclusion of R40 000, but the annual exclusion is not available to companies and other trusts. A capital loss is reduced by the annual exclusion. An assessed capital loss will be carried forward to the next year of assessment.

Lastly, you first have to make use of the annual exclusion before you apply the applicable inclusion rate.

A non-resident will not be liable for CGT except on the disposal of

immovable property situated in South Africa and any interest (see SILKE 28.3) in it (paragraph 2(1)(b)(i))

assets effectively connected with a permanent establishment through which the non-resident carries on business in South Africa (paragraph 2(1)(b)(ii))

A non-resident who disposes of any immovable property in the Republic, the proceeds of which exceed R2 million, will be subject to withholding tax in terms of section 35A of the Act – refer to learning unit 5. This withholding tax is a prepayment of the non-resident's normal tax and must be withheld by the purchaser.

7.6 PART III OF THE EIGHTH SCHEDULE – DISPOSAL OF ASSETS


below.

Work through SILKE (as indicated below) and any notes provided.


Reference to SILKE

Application Notes Level

par 11 28.7, 28.7.1, 28.7.2

Disposals and non-disposals 7.6.1 3

par 12, 12A & s 9H

28.7.3 Events treated as disposals and acquisitions 7.6.2 LU 5

3

par 13 28.7.4 Time of disposal 7.6.3 3

par 14 28.7.5 Persons married in community of property 7.6.4 3

The Eighth Schedule can only apply when there is a disposal (paragraph 11) or deemed disposal (paragraphs 12, 12A and section 9H) of an asset. Every person (as defined in the Act) is subject to the CGT rules contained in the Eighth Schedule. What is meant by a deemed disposal? A deeming provision means that the normal logical rules are disregarded and the exception to the rule must be applied in a certain given situation.

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7.6.1 Paragraph 11: disposals Disposal is defined in paragraph 1 and refers to the comprehensive definition in paragraph 11. This definition boils down to "you had something (an asset), then an event happens and after that event you no longer have the asset or the enjoyment of the asset". A disposal is the event that triggers CGT. An event is usually caused by a change in ownership (for example, selling the asset, donating an asset, loss of the asset, the asset is destroyed or even expropriated). The death of a person will also be a CGT event because the assets are transferred to the estate of the deceased. On the other hand, a temporary cession of an asset for financial purposes means that you will get your asset back if you fulfil the terms of the agreement. A temporary cession of an asset for financial purposes is therefore not treated as a disposal. CGT is not levied on non-disposals in terms of paragraph 11(2) (see SILKE 28.7.2). 7.6.2 Paragraph 12: events treated as disposals and acquisitions (deemed disposals) These are deeming provisions and they apply when the situation of the taxpayer changes or where the nature of the asset changes or when an event occurs that may fall outside the CGT net.

An asset ceases to be trading stock (paragraph 12(3)) The use of the asset changes from speculation (revenue in nature) to investment (capital in nature) purposes. Section 22(8) deems a disposal to have taken place at market value. The cost of the trading stock will be deductible in terms of section 22(2) as opening stock or as purchases if bought during the same year of assessment. A normal tax liability originates and the profit will be taxed at the normal tax rate, although there has been no change in ownership. A deemed acquisition has taken place in terms of paragraph 12(3) of the Eighth Schedule and the value taken into account in section 22(8)(b)(v) of the Act will be deemed to be expenditure actually incurred for the purposes of paragraph 20(1)(a) (base cost provision). If the asset, which is now kept as an investment, is disposed of at a later stage, then a further tax liability may arise in terms of the Eighth Schedule – proceeds less base cost (calculated in terms of section 22(8)).

Trading stock will be discussed in full in TL106. See also the commentary on the Natal Estates case in TL102. Remember that if paragraph (jA) of the gross income definition applies, trading stock "manufactured" by the taxpayer does not change its nature and will be treated as trading stock until disposed of.

Personal-use asset becomes a trade asset (paragraph 12(2)(d)) Certain capital gains on personal-use assets are disregarded in terms of paragraph 53 of the Eighth Schedule. A personal-use asset is an asset of a natural person or a special trust used mainly for purposes other than the carrying on of a trade. If (for example) a piece of furniture is used in a home for private purposes and the owner decides to use this furniture for trade purposes in his office, the use of the asset changes from a personal-use asset to a trade asset. A deemed disposal takes place at market value and a deemed reacquisition of the asset takes place at market value.

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Example: Personal-use asset becomes a trade asset

Facts: Mr Engineer (not a vendor for VAT purposes) resigned from his employment and started his own business. Furniture with a cost price of R7 000 and a market value of R8 000 was moved from his home to his office on 1 March 2016. Tax effect: A deemed disposal (of the personal-use asset) and immediately thereafter a reacquisition of the trade asset takes place in terms of paragraph 12(2)(d) of the Eighth Schedule. Calculation of taxable capital gain on deemed disposal R Proceeds 8 000 Less: Base cost (7 000)

Capital gain 1 000 Less: Disregard (par 53(1)) (1 000)

Taxable capital gain nil

Calculation of taxable income

Assume that the Commissioner will allow a section 11(e) allowance on R8 000 (based on the market value) over a remaining period of 2 years. Note that the base cost of the asset is R8 000 (market value on day of disposal (par 12(2)(d)).

R Gross income Less: section 11(e) (R8 000/2)

XXX (4 000)

Add: Taxable capital gain nil

Capital asset becomes trading stock (par 12(2)(c))

Example: Change of intention – capital asset to trading stock

Facts: Fanie Farmer bought a farm for R5 000 000 on 10 January 2008. The farm was used for farming purposes and all produce was exported. Because of the strengthening of the rand and the high return on his investments, his efforts put into farming activities are no longer worthwhile. He decides to rezone the farm for residential purposes and to develop the farm into a small but exclusive golf estate. Fanie decides to do the development himself to keep himself busy. He also believes that the return on his surplus funds, which he will invest in this project, will be more than the 8% that he is currently earning. The development will start in January 2017 (after the harvest season) and he believes that the first sales will be made in the following year of assessment. The market value of the farm is R7 000 000 in January 2017. Assume that Fanie will be able to prove the nature of the asset as capital until he changed his intention. He will also be able to prove the market value as R7 000 000 in January 2017. Result: A deemed disposal of an asset took place. The provisions of the Eighth Schedule must be applied.

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Calculation of taxable capital gain R Proceeds (deemed disposal par 12(2)(c)) 7 000 000 Less: Base cost (par 20) (5 000 000)

Capital gain 2 000 000

Taxable capital gain (R2 000 000 – R40 000) x 40% inclusion rate 784 000

Calculation of taxable income R R Sales (trading stock - land) nil Less: Deemed acquisition cost (section 22(3)(a)(ii)) (7 000 000) Plus: Closing stock (section 22(1)) 7 000 000 nil

Plus: Taxable capital gain (section 26A) 784 000

Taxable income 784 000

Trade asset becomes a personal-use asset (paragraph 12(2)(e)) A trade asset is now being used for personal use. A deemed disposal has taken place at market value and a capital gain or loss should be determined. A recoupment in terms of section 8 of the Act could also be applicable.

Reduction of debt and paragraph 12A – also refer to par 7.9.2 below and TL106

This is a uniform debt relief system that comes into operation through section 19 of the Act, but it also has a CGT effect which is mainly contained in paragraph 12A of the Eighth Schedule. Section 19 (see SILKE par 9.10.7) is dealt with in detail in TL106. However, you have to have a basic understanding of par 12A of the Eighth Schedule. SILKE 2017 chapter 9 shows the interaction between section 19 and paragraph 12A of the Eighth Schedule, as well as the steps to be taken in applying the reduction amount in the debt reduction process,

Section 19 Par 12A

Tax-deductible expenses

1. Reduction

amount

recouped

under s 19(5)

and s 8(4)(a)

Trading stock

1. Reduction

amount applied

to reduce cost

of trading stock

(s 19(3))

2. Excess of

reduction

amount

recouped under

s 19(4) and

s 8(4)(a)

Allowance assets

1. Reduction

amount applied

to reduce base

cost of allowance

asset (par 12A)

2. Excess of

reduction

amount

recouped under

s 19(6) and

s 8(4)(a)

Capital assets (not allowance assets)

1. Reduction amount

applied to reduce

base cost

(par 12A)

2. Excess reduction

amount applied to

reduce assessed

capital loss

(par 12A)

3. Any excess of the

reduction amount left

will have no tax effect

60 TAX4861/104

7.6.3 Paragraph 13: time of the disposal The general timing rule is that a disposal of an asset and the acquisition of the asset by another person must take place on the same date. Exceptions to this rule occur and you should study them in SILKE 28.7.4.

The time of the disposal of an interest in an asset of a trust to a beneficiary when the beneficiary has a vested interest in the asset is the date on which the interest vests. Trusts will be dealt with in detail in TL105.

7.6.4 Paragraph 14: disposals by spouses married in community of property Spouses married in community of property are equal owners of joint property. Disposals of assets (part of the joint estate) are deemed to be made in equal shares, unless they were excluded from the joint estate.

7.7 PART V OF THE EIGHTH SCHEDULE – BASE COST


below. Work through SILKE (as indicated below) and any notes provided.

Ignore notes on controlled foreign companies and section 8C as well as 28.8.1 note 9 and Example 28.13 to 28.15 in SILKE. We will work through these in TL105, TL106 and TL107.


Reference to SILKE


par 20 & s 23C

28.8, 28.8.1, 28.8.2, 28.8.3 and 28.8.4

Base cost of an asset

7.7.1

3

par 20A Provisions relating to farming development expenditure

excluded

par 21 28.8.5 Limitation of expenditure 3

par 22 28.8.6 Amount of donations tax included in base cost 7.7.2 3

par 23 28.12.1 Value-shifting arrangement – par 1 definition base cost formula in par 23

- 3 excluded

par 24 28.8.7 Base cost of an asset of an immigrant - excluded

par 25(1), 26 & 27

28.8.8 Base cost of pre-valuation date assets 7.7.3 3

par 25(2) & (3) 28.13.2 Redetermination of pre-valuation assets 7.7.3 excluded

par 28 28.8.9 Valuation date value of an instrument - excluded

par 29 28.8.10 Market value on valuation date - excluded

par 30 28.8.11 Time-apportionment base cost (amounts will be provided, integration remains important)

7.7.3 3

par 31 28.8.12 Market value will be provided - excluded

par 32 28.8.13 Base cost of identical assets 3

par 33 28.8.14 Part disposals - 3

par 34 28.8.15 Debt substitution - 3

61 TAX4861/104

7.7.1 Base cost of an asset – paragraph 20 Base cost is all the direct expenditure attributable to get the asset in its current condition. If an asset was acquired by way of an event other than purchase, the market value on the date of the event will usually be taken as the base cost on the date of acquisition. The following diagram provides an overview of the determination of base cost:

DATE ON WHICH THE ASSET WAS ACQUIRED

BEFORE VALUATION DATE ON OR AFTER VALUATION DATE (1/10/2001) PRE-VALUATION DATE ASSET ASSET PAR 25 (which refers to par 26, 27 or 28) PAR 20

So, if the asset was acquired on or after 1 October 2001, its base cost is determined in terms of paragraph 20. If the asset was acquired before 1 October 2001, its base cost is determined in terms of paragraph 25:

the valuation date value in terms of paragraphs 26, 27 or 28, plus

expenditure incurred on or after 1 October 2001, which is allowable in terms of paragraph 20 Paragraph 20 of the Eighth Schedule provides that if all or a portion of the base cost has already been taken into account in the calculation of taxable income (before the inclusion of any taxable capital gain), the base cost must be reduced by that amount (par 21(1)). If this were not the case, then the taxpayer would have been able to deduct the same amount twice.

Example: Calculation of base cost

A machine was acquired for R100 000 (VAT excluded) for use in a manufacturing process. A section 12C allowance was claimed, which reduced the taxpayer's normal tax liability. When the asset is disposed of, the base cost of that asset must be reduced by amounts already taken into account in terms of the section 12C allowance.

If an input tax credit was not allowed in terms of the VAT Act, the VAT cost will form part of the qualifying expenditure of the asset.

62 TAX4861/104

The following example has been taken from the SARS comprehensive CGT guide and adjusted for amendments to the legislation:

Example: Improvements reflected in state or nature of asset at date of disposal

(paragraph 20(1)(e))

Thabi acquires a second property at a cost of R300 000 in November 2005 from which she derives rental income. She replaced the kitchen at a cost of R30 000 and installed a security system costing R10 000. In 2008 she installed a jacuzzi in one of the bedrooms at a cost of R25 000. In October 2016, the jacuzzi cracked and all the water leaked out. It was not worth repairing, so she had it removed. Thabi's base cost will be R300 000 + R10 000 = R310 000. The replacement of the kitchen is not added to the base cost as it is considered to be a repair and the jacuzzi is not added to the base cost either as it no longer exists as part of the property. 7.7.2 The workings of paragraph 22 Formula in terms of paragraph 22 = [(M - A)/M] x D Where: M = market value of donated asset A = all amounts other than donations tax taken into account in determining base cost D = total amount of donations tax payable

Example: Donation of a block of flats - paragraph 22

My brother and I wish to donate our block of flats in the Republic to an inter vivos trust. The beneficiaries will be our children. My brother is a non-resident. We are both married out of community of property. The rental income will be utilised to pay for our children's university fees. The cost price of the block of flats was R6 000 000 on 1 May 2006, when we acquired it in equal partnership. The market value of the donation will be R8 000 000. We (my brother and I) did not make any other donations for the current year of assessment. Please calculate the capital gain (if any) for both me and my brother on the disposal of the asset to the trust. Suggested solution Non-resident – block of flats R Proceeds 50% x R8 000 000 4 000 000 Less: Base cost 50% x R6 000 000 (3 000 000)


63 TAX4861/104

Resident – block of flats R Proceeds 4 000 000 Less: Base cost R3 mil + (R4 mil – R3 mil/R4 mil x R780 000) (3 195 000)

Capital gain 805 000

Donations tax: (R4 000 000 – R100 000) (par 56(2)(b)) x 20% = R780 000

The brother is a non-resident and not subject to donations tax.

The non-resident is liable for CGT (fixed property situated in RSA).

Although section 35A (withholding tax) applies to non-resident sellers of South African fixed property (where the selling price exceeds R2 million), it cannot apply in this case as there is no amount payable by the purchaser to the seller.

7.7.3 Base cost of pre-valuation date assets (acquired before 1 October 2001) CGT was introduced on 1 October 2001. Prior to that date, assets were not subject to CGT. These assets (pre-valuation date assets) must be brought into the CGT net at a base cost that is fair to the tax-payer and ensures that the taxpayer does not pay tax on the increased value of the asset up to 1 October 2001. Paragraphs 25 to 28 apply to pre-valuation date assets. Paragraph 25(1) refers the calculation of the pre-valuation assets base cost to paragraphs 26, 27 or 28. Paragraph 25(2) and (3) (excluded from your syllabus) refers to capital gains and losses extending over more than one year. Although you will not be tested on the redetermination of pre-valuation date assets, we briefly mention its application. The capital gain or loss of the pre-valuation date asset must be redetermined in the following circumstances:

Additional proceeds were received.

Proceeds were taken into account but they became irrecoverable or repayable, they were cancelled or the taxpayer has no right to them anymore.

Additional expenditure has been incurred.

Expenditure previously taken into account has been recovered or recouped. A redetermination simply means recalculating the capital gain or loss from the start, taking all the new information into account. Paragraph 26 will be used where the proceeds exceed the expenditure (allowable in terms of paragraph 20) upon the disposal of an asset. In terms of paragraph 26, the taxpayer has an option to determine the valuation date value of these assets using either

20% of proceeds (after deducting an amount equal to the allowable expenditure in terms of paragraph 20 incurred on or after 1 October 2001); or

the time-apportionment base cost (TABC) method (paragraph 30); or

the market value on 1 October 2001. Because (in the opinion of SARS) taxpayers could possibly manipulate the market value of pre-valuation date assets, strict rules were incorporated into the Eighth Schedule regarding capital losses made on these assets.

64 TAX4861/104

The base cost will be the sum of the valuation date value (which should be the most beneficial option for the taxpayer) and expenditure allowable in terms of paragraph 20 incurred on/after 1 October 2001. Use the diagram provided in 28.8.8 in SILKE to see how the valuation date value will be determined in terms of either paragraph 26 or 27 (so-called kink test).

Paragraph 26 sets out the method when the proceeds of an asset exceed expenditure or expenditure cannot be determined (historical gain). Paragraph 27 is used where the proceeds of an asset do not exceed the expenditure (historical loss or break-even).

Example: Pre-valuation assets: application of paragraphs 26 and 27

Gary sold the following pre-valuation date assets (all shares) during the 2017 year of assessment:

Proceeds

R

Cost price

R

Market value at 1 October 2001

R

Time-apportionment base cost (R)

Company A 200 000 120 000 210 000 160 000

Company B 120 000 150 000 140 000 130 000

Company C 190 000 250 000 280 000 210 000

Company D 50 000 40 000 48 000 45 000

Calculate the capital gain or loss in terms of paragraphs 26 and 27 of the Eighth Schedule for each disposal, if any. Show the calculation of the base cost of each asset. Suggested solution Shares Company A R Proceeds 200 000 Less: Base cost Par 26(3)

(Proceeds less par 20 expenses after valuation date) R200 000 – R0 = R200 000

(200 000)

Capital gain or (loss) nil

Shares Company B Proceeds 120 000 Less: Base cost Par 27(3)(a)

((Higher of R140 000 (MV) or R120 000) – R0)

(140 000)

Capital loss (20 000)

Shares Company C Proceeds 190 000 Less: Base cost Par 27(3)(b)

(Lesser of R210 000 (TABC) or R280 000)

(210 000)


65 TAX4861/104

Shares Company D R

Proceeds 50 000 Less: Base cost Par 26(1)

(Higher of R48 000 (MV) or R45 000 (TABC) or R10 000) (20% (R50 000 – R0))

(48 000)

Capital gain 2 000

7.8 PART VI OF THE EIGHTH SCHEDULE - PROCEEDS


below.

Work through SILKE (as indicated below) and the notes provided.

Legislation 8th

Schedule

Reference to SILKE


par 35 28.9, 28.9.1

Proceeds (definition, inclusions and when proceeds must be reduced)

7.8.1 3

par 35(1A) 28.9.2 Shares issued by resident company in exchange for shares in a foreign company

excluded

par 35A 28.9.3 Disposal of certain debt claims excluded

s 24M 28.9.4 Incurred and accrued amounts not quantified 3

par 36 28.11.5 Disposal of partnership assets TL107 3

par 37 28.9.6 Assets of trusts and companies excluded

par 38 28.9.7 Disposal and donations not at arm's length or to a connected person

7.3 3

par 39 28.9.8, 28.10.5

Capital losses on disposals to connected persons 3

par 39A 28.9.5 Disposal of asset for unaccrued amount of proceeds

3

par 40 28.11.2 Disposal to and from deceased estate excluded

par 41 28.11.2 Tax payable by heir of deceased estate excluded

s 9HA 28.11.3 Disposal by deceased person only in CTA 2

s 25 28.11.3 Taxation of deceased estates only in CTA 2

par 42 28.12.2

Short-term disposals and acquisitions of identical financial instruments

excluded

par 43 28.12.7 Assets disposed of or acquired in foreign currency TL106 3

par 43A 28.12.3 Pre-sale dividends treated as proceeds excluded

par 43B 28.12.8 Base cost of assets of controlled foreign companies

excluded

66 TAX4861/104

7.8.1 Proceeds (general – paragraph 35) The amount received by or accrued to the seller will be either the selling price (if it is an arm's-length transaction), or it will be the market value at date of disposal. Where an amount was already taken into account in taxable income before the inclusion of taxable capital gain, then the proceeds must be reduced by that amount. The same amount should not be taxed twice. 7.9 PART IV OF THE EIGHTH SCHEDULE – LIMITATION OF LOSSES


below.


Revise paragraph 39 (see above).

Read the definition of a connected person in section 1 of the Act.


Reference to SILKE


par 53 28.9.6, 28.10.2 note 1

Personal-use assets 7.9.1 3

par 15 28.9.6, 28.10.5 Certain personal-use assets 7.9.1 3

par 19 28.12.4 Losses on disposal of certain shares TL105 3

par 56 28.10.2: note 4, 28.10.5

Disposal by a creditor of debt owed by a connected person

7.9.2

3

7.9.1 Paragraph 15: certain personal-use assets Personal-use assets are defined in paragraph 53. Certain personal-use assets will be included in the CGT net (a capital gain will be taken into account), irrespective of (disregarding) their use (paragraph 53). However, a capital loss on the following assets will be disregarded:

an aircraft (empty mass exceeding 450 kg) (paragraph 15(a))

a boat (exceeding 10 m in length) (paragraph 15(b))

any fiduciary, usufructuary or other similar right (paragraph 15(c))

any lease of immovable property (paragraph 15(d))

time-sharing interest/shares in share block company with a fixed life

A personal-use asset of an individual or special trust for which an allowance was paid for the use of the asset for business purposes (e.g. a cell phone, motor vehicle) must be treated as a personal-use asset.

7.9.2 Interaction between paragraphs 12A, 39, 56, 20(3) and 35(1)(a) The following paragraphs deal with the CGT consequences of the reduction of a debt, reduction of base cost, refunds on proceeds and losses between connected persons and the subtle differences between them. You need to understand these. The differences between and the application of these paragraphs are summarised in the table below:

67 TAX4861/104

Eighth Schedule

Summary and application SILKE

12A Debt reduction

If the purchase of either an asset (other than an allowance asset) or an allowance asset was funded by a debt and the debt is consequently reduced by the creditor, the reduction amount (in the hands of the debtor) is applied as follows and in the following order:

Asset (non-allowance asset) o Reduce the base cost of the underlying asset by the reduction

amount. o If the asset is not on hand, reduce the assessed capital loss by the

reduction amount. o If the assessed capital loss is depleted, there is NO capital gain on

balance.

Allowance asset o Reduce the base cost of the underlying asset by the reduction

amount. o If the asset is not on hand, reduce the assessed capital loss by the

reduction amount. o If the assessed capital loss is depleted, then recoupment is made in

terms of section 19. o No balance applicable.

See examples 28.8 and 28.9 in SILKE.

Par 12A therefore applies to the debtor. Remember, the amount which is outstanding and which is reduced will represent a credit amount in the books of the debtor if you think in accounting terms.

28.7.3

56 Losses

When a creditor disposes (includes the reduction of that debt) of a debt owed by a debtor who is a connected person, any loss on that disposal must be disregarded by that creditor. This paragraph will not apply if par 12A applies (to the debtor). Par 12A will apply if there is an underlying asset linked to the debt.

Par 56(2)(a) therefore applies to the creditor. Remember, the amount disposed of (or written off) will represent a debit amount (hence a loss) in the books of the creditor if you think in accounting terms.

28.10.2 Note 4

39 Clogged losses

This paragraph ring-fences a capital loss between connected persons. Such losses may only be offset against future capital gains between the same connected persons. These are called clogged losses. If par 56(2)(a) applies, then par 39 will not apply.

Par 39 therefore applies to the seller of the asset.

28.9.8

20(3) Base cost

This paragraph is only applicable if the base cost of the asset is reduced or recovered. If the asset is no longer on hand, there will be a capital gain. If the reduction or recoupment of expenditure relates to a debt reduction, par 12A applies.

See example 28.16 in SILKE.

Par 20(3) applies to the buyer of the asset.

28.8.3

35(1)(a) Proceeds

If for some reason the selling price of an asset is reduced, the seller of the asset must reduce the "proceeds" of this asset by that amount.

See example 28.38 in SILKE.

Par 35(1)(a) applies to the seller of the asset.

28.9.1

68 TAX4861/104

7.10 PART VIII OF THE EIGHTH SCHEDULE - OTHER EXCLUSIONS An exclusion for CGT purposes will disregard a capital gain or loss on an asset. You have to know which assets are excluded from the CGT net, as no capital gain or loss is calculated on the disposal of these assets. Exclusions, limitations of capital losses and the roll-over relief are exceptions to the general rules.

Read the introduction in SILKE 28.10 (exclusions, roll-overs and attributions).

Read the applicable paragraphs in the Eighth Schedule to the Act as indicated in the table below. Work through SILKE (as indicated below) and the notes provided.

Note that we will deal with Part VII of the Eighth Schedule (primary residence exclusion) later on.


Reference to SILKE


par 52 28.10.2 General principles 3

par 54 28.10.2: Note 2

Lump-sum retirement benefits of a natural person note below

3

par 55 Note 3 Long-term assurance policies note below

3

par 57 Note 5 Disposal of small business assets of a natural person

3

par 57A Note 6 Disposal of micro business assets excluded

par 58 Note 7 Options exclusion 3

par 59 Note 8 Compensation for personal injury, illness or defamation

3

par 60 Note 9 Gambling, games and competitions 3

par 61 Note 10 Collective investment scheme in securities 3

par 62 Note 11 Donations and bequests to public benefit organisation (PBO)

3

par 63 Note 12 Exempt persons 3

par 63A Note 13 Public benefit organisations excluded

par 63B Note 14 Small business funding entities excluded

par 64 Note 15 Assets used to produce exempt income excluded

par 64A Note 16 Awards under the Restitution of the Land Rights Act 7.3 3

par 64B(1) Note 17 Disposal of equity shares in foreign company. Study only subparagraph (1), as the remainder of the subparagraphs are excluded from the SAICA examinable pronouncements.

TL 105

3

par 64C Note 18 Disposal of restricted equity instruments – only linked to s 8C(4)(a))

3

Par 64D Note 16 Land donated in terms of land reform measures 7.3 3

Note on paragraphs 54 and 55 The right to claim an amount from a retirement fund or insurer is an asset for CGT purposes. This should not be confused with the payment of an insurance or retirement amount. Currency (cash) is excluded from the definition of an asset and will not be subject to CGT. When the right to claim the amount is turned into currency, the disposal of that right is disregarded in terms of paragraphs 54 and 55.

69 TAX4861/104

7.11 PART VII OF THE EIGHTH SCHEDULE - PRIMARY RESIDENCE EXCLUSION


below.


Legislation

8th Schedule

Reference to SILKE


par 44 28.10.1 Definitions (with regard to primary residence exclusions)

7.11.1 3

par 45 General principles 7.11.1 and

7.11.2

3

par 46 Size of residential property qualifying for exclusion 7.11.2 3

par 47 Apportionment in respect of periods when not ordinarily resident

7.3,

7.11.2

3

par 48 Disposal and acquisition of primary residence 7.11.2 3

par 49 Non-residential use 7.3, 7.11.3

3

par 50 Rental periods 7.11.2 3

70 TAX4861/104

7.11.1 Primary residence exclusion The following diagram provides an overview of the primary residence exclusion in terms of par 45:

DISPOSAL OF A PRIMARY RESIDENCE AND

PROCEEDS FROM THE DISPOSAL EXCEED R2 MILLION NO YES AND FROM 1/10/2001 UNTIL DATE OF DISPOSAL: a natural person/beneficiary of special trust resided there OR that person (see ) did not use residence or part of it for carrying on a trade YES NO Apply par 45(1)(b) Apply par 45(1)(a)

When the proceeds in respect of the disposal of a primary residence, by a natural person or special trust, are less than or equal to R2 million, any capital gain or loss will be disregarded (paragraph 45(1)(b)). However, paragraph 45(1)(b) will not be applicable if the natural person, or a spouse or beneficiary of a special trust

did not ordinarily reside there for the full period (from 1 October 2001 until date of disposal); or

used the residence (or a portion of it) for the purposes of carrying on a trade for any portion of the period commencing from 1 October 2001 until date of disposal.

7.11.2 Primary residence exclusion (general) Only a natural person or a special trust qualifies for a R2 million exclusion on the capital gain or loss when a primary residence is disposed of. The capital gain or the loss on disposal must first be calculated before the exclusion will apply. A natural person/special trust may only have one primary residence per tax period. A primary residence is the place where the taxpayer normally resides. A primary residence may also be a boat or caravan and is not restricted to fixed property. The R2 million exclusion is not a once-in-a-lifetime exclusion. However, uninterrupted ordinary residence is required (paragraph 47) for use of the full exclusion. So, if a residence is used for part of the period, an adjustment must be made. For example: it is possible that a taxpayer may buy a home and use it for, say, 5 years as a primary residence and then move to another house. This 5-year period will qualify for the primary residence exclusion, even if the taxpayer does not use it for residential purposes anymore. If the asset (home) is then sold (say after 12 years), only a portion (relating to the actual period lived in the house, that is 5/17) of the total capital gain can qualify for the primary residence exclusion.

71 TAX4861/104

If a portion of a primary residence is used for trade purposes, the taxpayer can deduct qualifying expenses relating to that portion through the Act, which will reduce the taxable income. When this property is sold, there will be no recoupment of the amounts previously deducted as running costs, as this type of expenditure does not enhance the value of the property. However, the capital gain that will qualify for the primary residence exclusion (in terms of paragraph 49) will be reduced by the portion of the residence that had been used for trade purposes. This portion will be subject to CGT. If the property exceeds 2 hectares (paragraph 46), only the portion of the capital gain made on the area that does not exceed 2 hectares will qualify for the primary residence exclusion. The following examples were taken from SARS comprehensive guide to CGT (adapted for legislative amendments).

Example 1: Primary residence

Dinesh purchased a residence to be utilised solely as a primary residence on 1 October 2010 at a total cost of R1 250 000. Six years later (1 October 2016), Dinesh sells this primary residence for R3 500 000 in order to purchase another primary residence. Assuming Dinesh pays income tax at the maximum marginal rate of 41% and that he has no other capital gains or losses in the year of assessment in question, his additional income tax liability as a result of the capital gain realised is determined as follows: R Proceeds 3 500 000 Less: Base cost (1 250 000)

Capital gain 2 250 000 Disregarded in terms of par 45(1)(a) (2 000 000) Less: Annual exclusion (40 000)

Aggregate capital gain 210 000

Taxable capital gain (R210 000 x 40%) 84 000

Tax payable (R84 000 x 41%) 34 440

The R2 million exclusion operates on a primary residence basis and not on a person holding an interest in the primary residence basis.

72 TAX4861/104

Example 2: Spouses married in community of property

The facts are the same as for the above example, except that Dinesh is married to Divia in community of property and the primary residence falls within their joint estate. Assuming that Divia has no other capital gains or losses in the year of assessment in question, Dinesh and Divia's taxable capital gains are determined as follows: Total Dinesh Divia R R R Capital gain (apportioned in terms of par 14) 2 250 000 1 125 000 1 125 000 Disregarded in terms of par 45(1)(a) (2 000 000) (1 000 000) (1 000 000) Annual exclusion (40 000) (40 000)

Aggregate capital gain 85 000 85 000

Taxable capital gain (R85 000 x 40%) 34 000 34 000

7.11.3 Non-residential use: paragraph 49 The purpose of this paragraph is to allow the primary residence exclusion only in respect of the portion of the capital gain or capital loss on the disposal of the primary residence that is attributable to any period on or after valuation date during which the taxpayer used that residence for domestic purposes as well as to the part used mainly for purposes other than the carrying on of a trade.

Example 3: Residence used partly for trade purposes and interrupted residence

Yolandi acquired a residence on valuation date for R350 000 and resided in it for 10 years. During this time she operated her consulting business from the premises. Approximately 35% of the floor space was used for business purposes. Yolandi also claimed 35% of her current costs as a business expense against her business income for tax purposes. As an opportunity arose for her to expand her business 10 years after she had acquired the property, she purchased another residence in which to live and converted her old residence into business premises. Fifteen years after converting the property, she sold it for R2 650 000. Improvements over the years and all other capital costs associated with the acquisition and disposal of the property amounted to R250 000. R Proceeds upon disposal 2 650 000 Less: Base cost (R350 000 + R250 000) (600 000)

Capital gain 2 050 000 Period not occupied as primary residence (R2 050 000 x 15/25) (1 230 000)

820 000 Part partially used for trade purposes (R820 000 x 35%) (287 000)

Capital gain attributable to being a primary residence 533 000

Yolandi will be able to apply the primary residence exclusion to R533 000 of the total capital gain realised. The balance of R1 517 000 (R1 230 000 + R287 000) will be subject to CGT and will be aggregated by any other capital gains or losses arising in the year of disposal before the R40 000 annual exclusion is applied.

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7.12 PART IX OF THE EIGHTH SCHEDULE - ROLL-OVERS


below.


7.12.1 Roll-overs (general) Certain capital gains may be rolled over before determining the aggregate capital gain or loss. Roll-over means that either the base cost is transferred to the new owner (meaning that there is no CGT effect for the person transferring the asset), or the capital gain is spread over a period. These are relief measures. 7.12.2 Paragraph 67: transfer of asset between spouses In terms of paragraph 67 where a person disposes of an asset to his/her spouse, any capital gain or loss is disregarded. The transferee spouse takes over all aspects relating to the asset. The transferee is therefore treated as having acquired the asset at the same time, for the same cost, in the same currency and for use in the same manner as the transferor during the ownership by the transferor. The asset is transferred between spouses at base cost. No capital gain or loss is taken into account at the time of the transfer (disposal). When the new owner (spouse) sells the asset, the base cost will be the original base cost for the spouse that transferred the property plus any subsequent qualifying costs (paragraph 20). This provision is subject to the attribution rules in terms of part X in the Eighth Schedule. Work through chapter 28.10.3.3 in SILKE for a detailed explanation of the provisions of paragraph 67. 7.13 DEALT WITH IN LATER TUTORIAL LETTERS Part X: Attribution of capital gains (par 68 – 73) – with trusts (TL105) Part XI: Company distributions (par 74 – 78) – with dividends (TL105) Part XII: Trusts and trust beneficiaries (par 80 – 82) – with trusts (TL105)

Read through the Beancounter scenario again and make a rough summary of what your solution would be. Now read through the outcomes of the scenario to see if your answer was correct.


Reference to SILKE


par 65 28.10.3, 28.10.3.1

Involuntary disposal – Exclude par 65B

TL106 3

par 66 28.10.3.2 Reinvestment in replacement assets TL106 3

par 67 28.10.3.3 Transfer of asset between spouses 7.12.1, 7.12.2

3

par 67B, C & D

28.10.3.4 Share block companies, mineral rights and communication licences

excluded

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7.14 OUTCOMES OF THE BEANCOUNTER SCENARIO You should have realised immediately that your answer should consist of two parts:

the donation and disposal of the beach cottage

the sale of their residence to the Butterbean Trust Let's start with the donation of the beach cottage to Barry's son. Did you identify the critical issues as the following?

Both Barry and Bizzie are residents in the Republic and will be taxed on their worldwide income (which will include CGT on the disposal of their assets).

Donations tax is levied on donations made by residents in the Republic.

The beach cottage does not form part of their joint estate.

The beach cottage was donated to Barry's son; therefore donations tax will be levied.

The donee (Soya) is a non-resident. There could be a section 7 application (see TL105).

There is transfer duty payable by Soya (VAT is not levied on this transaction). Your answer should include the following: Beach cottage Mr Beancounter purchased the beach cottage on 10 March 2016. The base cost will be determined in terms of paragraph 20 of the Eighth Schedule to the Act. Because the disposal of the beach cottage to Soya was a gratuitous disposal of an asset, donations tax is payable (as well as transfer duty). We should calculate the donations tax payable. The value of the beach cottage for donations tax purposes will be the market value. There is no section 56(1) exemption available in this case. Calculation of donations tax R Market value of the beach cottage on 30/09/2016 1 360 000 Less: Exemption in terms of s 56(2)(b) (balance left – refer to TL103 p 19) (60 000)

Taxable amount (of the donation) 1 300 000

Donations tax at 20%

260 000

Why only a R60 000 exemption and not R100 000? Do you remember that Barry donated some amounts during the 2017 year of assessment (TL103) to his family?

Please remind Barry that he has to pay the donations tax to SARS at the end of the month following the month in which the donation was made! Remember that the primary residence exclusion cannot apply because this was not the primary residence of Barry and Bizzie.

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Now you can calculate the capital gain or loss on the disposal of the beach cottage: Calculation of capital gain or loss R Proceeds 1 360 000 Less: Base cost in terms of paragraph 20 (1 200 000) Par 22 donations tax: R1 360 000 – R1 200 000 x R260 000 R1 360 000

(30 588)

Capital gain 129 412

The calculated capital gain of R129 412 should now be added to the other capital gains or losses that Barry could have for the year of assessment. Let's tackle the second part, the disposal of the primary residence to the trust. Did you identify the following critical issues?

Barry and Bizzie are married in community of property.

Transfer duty should be paid by the purchaser/donee in the absence of any agreement that the liability to pay transfer duty will rest on the seller/donor of the asset.

They do not have a history of buying and selling properties; therefore the transaction will be of a capital nature.

The property was sold at a market-related price; therefore there will not be a liability for donations tax.

However, the sale has been funded with an interest-free loan, which will be deemed to be an "other disposition" for the purposes of section 7(8) (see TL105).

Note that there were no selling expenses. Can you do the CGT calculation? This is a pre-valuation date asset, so base cost must be determined in terms of paragraph 25 (which refers to paragraphs 26, 27 or 28). Paragraph 26 will be applied, because proceeds exceed the expenditure. The taxpayer now has a choice of the following methods of determining the valuation date value:

20% of (proceeds less expenditure allowable in terms of par 20 after valuation date); or

the TABC method; or

the market value on 1 October 2001 (which is not available). You must choose the most beneficial method:

20% of (proceeds less expenditure allowable in terms of par 20 after valuation date) = (R2 200 000 - R600 000) x 20% = R320 000; or

TABC: par 30(2) will apply, because allowable expenditure (R600 000) was incurred after valuation date. (We show the calculation below for clarity – the TABC amount will be provided in questions if applicable.) So:

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P = R x B (A + B) = R2 200 000 x R120 000 (R600 000 + 120 000) = R366 667

Thus: Y = B + [(P - B) x N] T + N = R120 000 + [R366 667 - R120 000] x 16 15 + 16 = R247 312

20% of proceeds would provide the most beneficial valuation date value (VDV), so base cost will consist of the most beneficial VDV and cost incurred after 1 October 2001. Thus: R

Proceeds (market value on 30/09/16) 2 200 000 Less: Base cost (R320 000 + R600 000) (920 000)

Capital gain 1 280 000 Less: Partially used for trade purposes (30%) (384 000)

Capital gain attributable to primary residence 896 000

Barry and Bizzie are married in community of property, and therefore the capital gain has to be apportioned between them (paragraph 14): Barry Bizzie R R Capital gain that qualifies for primary residence exclusion (R896 000/2) 448 000 448 000 Par 45(1)(a): (R2 million x 50% each – limited to actual) (448 000) (448 000)

Part of CGT calculation nil nil

Capital gain that does not qualify for primary residence exclusion (R384 000/2)

192 000

192 000

The proceeds of the primary residence exceed R2 million, so paragraph 45(1)(a) will apply to the primary residence exclusion.

Although the clothing design business does not form part of their joint estate, the house sold to the trust was part of their joint estate. Half of the capital gain on the trade portion (R384 000 x 50% = R192 000) will be added to Barry's capital gain of R129 412 (capital gain on beach cottage – refer to above calculation). If there are no other capital gains or capital losses, he will be allowed a R40 000 annual exclusion. The remaining capital gain will be included at the inclusion rate of 40% (individual) in his taxable income in terms of section 26A. Bizzie would have to include half of the capital gain (R192 000) (trade portion) in her CGT calculation.

You are now ready to test yourself by working through the integrated examples in section B.

________________________ END OF LEARNING UNIT 7

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PLEASE NOTE

In terms of SAICA’s Taxation Examinable Pronouncements, tax amendments promulgated by 31 January 2017, and which are effective for the 2017 year of assessment, will be examinable. All amendments effective for years of assessment 2018 or later are not examinable. UNISA as well as the SAICA ITC 2018 will therefore test individuals with a 2017 year of assessment and non-natural persons with a December 2017 (or earlier) year of assessment. Monetary amounts as announced by the Minister of Finance in the budget speech of 2017 will be part of your assessment.

A total of two hours and 45 minutes of your study time is allocated to section B. The following time allocation for days 4 – 5 is recommended:


Day 4 – 25 February 2017 – 1.75 hours (Part 2)

Question 1 105

Day 5 – 26 February 2017 – 1 hour (Part 1)

Question 2 60

Total (2,75 hours) 165

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PURPOSE STATEMENT:

SECTION B contains integrated examples and is based on prior year’s examinations or test pa-pers. The goal of this section is firstly to assist you to integrate knowledge and to vest a way of thinking in order for you to answer the assignment, tests and exams and secondly to give you the opportunity to assess yourself against the outcomes for this module, as stated below. This will assist you in identifying any shortcomings in your preparation for the formative assessments (tests) and the final summative assessment (examination).

After completing the questions in the time limit you should be able to:

Demonstrate your competency to pass the formative assessments and summative assessment relating to the topics you have already covered so far.

You have to identify your shortcomings in order to rectify it before the tests and examination for example: - Time management problems; - Shortcoming in knowledge base; - Shortcomings in handling of data, for example: identifying the problem,

distinguishing between relevant and irrelevant information, analysing data, integrating data, evaluate alternatives and the ability to propose practical solutions;

- Problems communicating your findings etc.

This integrated example illustrates the application of the topics covered in this tutorial letter. We have, where applicable, added explanatory notes in the suggested solution. Before you attempt this question, read through our notes on exam technique (provided just before the suggested solution of question 1 in these notes). You will gain the best benefit by attempting the question yourself (as opposed to the “oh-yes method”) before working through the suggested solution.

Proposed self-assessment method:

Read the information given in the question carefully. Do not read the REQUIRED yet. (This is the method that will be followed in tests and the examination.)

15 minutes

Attempt the Question, but commence with reading the REQUIRED. 1 HOUR

Assess your answer with the help of the suggested solution. Identify where you made an error and refer back to the legislation and/or SILKE by making use of the references provided in the solution in order to re-affirm your knowledge and under-standing of the application of the legislation.

30 minutes

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QUESTION 1 40 Marks

You have to answer the following six independent case studies relating to South African residents, sepa-rately (ignore value-added tax): CASE 1 4 Marks Ajax Supermarket had the following sales for 16 November 2017: R Cash 72 000 Credit card transactions 49 000 On account 17 000 Total: 138 000 However, as the accounting clerk was on his way to the bank on 17 November 2017, he was robbed. R70 000 in cash was stolen - the balance of cash (R2 000) had been used to reimburse petty cash.

REQUIRED Marks

Discuss what amount (if any) should be included in gross income in respect of sales of 16 November 2017 for Ajax Supermarket. Also, refer to relevant case law.

4

CASE 2 3 Marks Mr Wheel and Deal is a sole trader (retailer) in tyres (catering for all kinds of vehicles) and he acquired trading stock at a cost of R50 000 on 12 February 2017. These items, while not having been disposed of before year-end, can in future be disposed of at a mark-up of 30% on cost. At year end (28 February 2017), the market value of these items amounted to R65 000. Mr Wheel and Deal is not sure as to whether he will be taxed on the growth in the value of these items when he is assessed in respect of the 2017 year of assessment.

REQUIRED Marks

Explain to Mr Wheel and Deal whether any portion of such an increase in the value of his trading stock can give rise to gross income in his hands for the 2017 year of assessment. Motivate your answer.

3

CASE 3 10 Marks Mr Solute Kerzner acquired equity shares in a company listed on the Johannesburg Securities Exchange (JSE Ltd) on 10 December 2013. At the time of acquisition, he intended to hold these shares as an investment. However, during July 2015, he changed his intention to that of speculating with listed shares, thereby effectively commencing to carry out a scheme of profit-making by trading with such shares. On 5 April 2016, these shares’ prices reached an all-time high and he decided to dispose of the shares at a considerable profit. Details of these shares are as follows: R Cost price 10 000 Value at the time of changing his intention 40 000 Proceeds on disposal 100 000

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REQUIRED Marks

(a) Briefly discuss whether the proceeds on the disposal of the listed shares during the 2017 year of assessment will constitute gross income in his hands. Refer to relevant case law.

(b) Explain the normal tax (including capital gains tax) implications (if any) that will flow

from the change of intention by Mr Kerzner during the 2016 year of assessment.

(C) Indicate whether your answer to (a) will be different if the acquisition date was 10 December 2012 (and not 10 December 2013) and, if so, indicate in what way.

4

3

3

CASE 4 7 Marks Mr Rocca Fella is 66 years of age, a South African resident, and married out of community of property. He is a wealthy, retired business man who, inter alia, has earned the following income during the 2017 year of assessment: R Local interest 60 000 Foreign dividends (the equivalent of) 30 000 Local dividends from listed companies 80 000 Royalty income from a South African registered patent, which is used in the United Kingdom (the equivalent of) 25 000

REQUIRED Marks

(a) Indicate whether Mr Fella will have to include any or all of the abovementioned amounts in his South African gross income for the 2017 year of assessment. Motivate your answer.

(b) Indicate the amount(s), if any, which will qualify for exemption in terms of

section 10 of the Income Tax Act.

3

4

CASE 5 3 Marks Mr Nerd is twenty-three years old and, during the current year of assessment, he was awarded a bona fide bursary amounting to R24 000 by his employer in an effort to encourage him to further his studies at the University of South Africa. His gross remuneration for the 2017 (current) year of assessment amounted to R240 000. Should Mr Nerd be unsuccessful in his studies, he will in terms of the agreement between the parties, be required to refund the full amount of the bursary to his employer.

REQUIRED Marks

Indicate whether Mr Nerd will be required to include any portion of the amount of R24 000 in his income (as defined) for the 2017 year of assessment. Motivate your answer.

3

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CASE 6 13 Marks Mr Chris Capastanio is a RSA resident and married out of community of property. He disposed of the following non-business capital assets (all post-valuation date assets) during the 2017 year of assess-ment (amounts have been converted correctly to Rands, where applicable): Cost Proceeds Note R R Immovable property in Spain 1 230 000 950 000 Flat in Camps Bay, donated to his wife 2 380 000 - Aircraft exceeding 450kg 3 800 000 920 000 Listed shares 4 120 000 100 000 Gold coins 80 000 97 500 Notes 1. The immovable property in Spain had been used over the years of ownership by the Capastanio

family as a holiday home, but with the rising costs in its up-keep as well as travelling costs for overseas excursions, it was decided to dispose of it to a non-connected person. The cost in ad-vertising the property as being “for sale”, amounted to the equivalent of R20 000.

2. The flat in Camps Bay is rented out to non-connected persons on a continuous basis and Mr Capastanio would like the rental income in future to accrue to his wife, who has no other tax-able income. At the time of the donation, the market value of this flat was established to be R1 350 000.

3. Mr Capastanio is quite passionate about flying and over weekends had spent hours up in the sky.

His deteriorating health as well as a series of recent aircraft disasters and/or accidents has led him to the decision to sell his aircraft to a non-connected person.

4. He disposed of some listed shares to his son (a major) for an amount equal to its market value

(R100 000). However, due to his son’s inability to fund the transaction, it was agreed that the out-standing balance would be financed by way of an interest-free loan by Mr Capastanio.

5. Mr Capastanio has a balance of an assessed capital loss of R20 000 which was carried forward

from the 2016 year of assessment.

REQUIRED Marks

Calculate the taxable capital gain to be included in the taxable income of Mr Capastanio for the 2017 year of assessment. Motivate your answer, where necessary.

13

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PROPOSED METHOD OF ANSWERING THE QUESTION (EXAM TECHNIQUE):

To make the most of the information provided in the allowable time, you ought to follow a certain thinking pattern and working method: 1. Factual information given (Question) Read the information/facts provided in the question and make notes/underline the information that you believe is important and relevant in providing the appropriate and correct answer. 2. Reading the “required” part:

The verbs used (explain, motivate, discuss, indicate and calculate) tell you exactly what is required of you. For example, the verbs indicate and motivate (as in (a) of Case 4) means that you have to use words when answering, but you may support your views with calculations, where applicable.

Case 6 starts off with calculate, which implicates that you have to show calculations. However, you have to motivate your answer, which means you have to refer to legislation in this case and use sentences to motivate your calculations.

Make sure what it is that you need to address, i.e. whether it be “tax” consequen-ces; “normal tax” consequences; discussions/calculations of “gross income” as defined; or “income” as defined; or “taxable income”; etc. – all of these will result in different answers – thus, read properly and ensure that your answer is appropriate to the question.

It follows that it is imperative to read the instruction(s) (“Required” part) carefully so that you do exactly what is required, as the marking plan for the question will be compiled in that way.

3. Communicate your answer

You now have to communicate your answer. Do every part of the question separately – in the same number format of the question and sub-questions. Be sure to address each of the item(s) requested in the required part.

Remember that the parts in the solution that are highlighted in grey should not be studied as this is excluded from the syllabus and is only included for completeness sake.

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QUESTION 1 SUGGESTED SOLUTION

CASE 1 An amount forms part of gross income on the earlier of receipt or accrual. As sales on account (credit) would have accrued to the taxpayer (unconditionally entitled to – Mooi’s case), these amounts constitute gross income. The total amount of R17 000 will have to be included in gross income (irrespective of the fact that the amount was not settled by the debtor). The cash sales and credit card transactions have been received (as required by the definition) by the taxpayer. Once an amount has been received (received on behalf of and for the benefit of such taxpayer - Geldenhuys’ case), the full amount of the cash sales namely R72 000 and the credit card transaction of R49 000 will have to be included in gross income. What happens subsequent to such receipt (or accrual) is of no concern other than to consider whether the stolen R70 000 may qualify as a deduction from “income”, but this aspect was not part of the question. The full amount received by or that accrued to the taxpayer will have to be included in gross income (R138 000). (Up to 2 bonus marks can be given for relevant case law.) (4) CASE 2 Before any amount can form part of the general definition of gross income, all of the elements (require-ments) of that definition must be met. One of these requirements is that there must either be a receipt or an accrual before an amount can be included in gross income. As it is clear that no amount has been received and an accrual is also lacking (stock not yet sold), there can be no suggestion that gross income has arisen. An accrual would require the taxpayer to have become unconditionally entitled (Mooi v SIR) to an amount. Mr Wheel and Deal is not entitled to any amount. No portion of such increase in the value of trading stock will be included in gross income. (3) CASE 3 (a) The proceeds on the sale of the shares will only constitute gross income if it is revenue in nature.

The intention of the taxpayer with regard to the shares will determine the capital or revenue nature of the proceeds. Initially, when the shares were bought, the taxpayer’s intention was to hold the shares as an investment (and earn dividend income), thus as a capital asset (“tree v fruit” – Visser’s case). However, the taxpayer’s intention changed in the course of the 2016 year of assessment from holding the shares as an investment to that of dealing in shares. The taxpayer has “crossed the Rubicon” (Natal Estates case) with no distinction between an investment and a speculative portfolio. Accordingly, the proceeds on the sale of the shares are revenue in nature and constitute gross income. (Up to 2 bonus marks can be given for relevant case law.) (4)

(b) In terms of paragraph 12(2)(c) of the Eighth Schedule, Mr Kerzner will be treated as having dis-

posed of his capital asset (the listed shares) for proceeds equal to its market value at the time of such change of intention (R40 000) while, in terms of section 22(3)(a)(ii), he will also be deemed to have acquired trading stock at a cost equal to that same market value (R40 000). The deemed disposal of the capital asset will result in a capital gain of R40 000 (deemed pro-ceeds) less R10 000 (base cost) = R30 000 for Mr Kerzner. In turn, Mr Kerzner will hold such shares (from the time of changing his intention) as part of his trading stock. (3)

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(c) Yes, it would differ. The shares would then constitute “qualifying shares” in terms of section 9C of the Income Tax Act and section 9C will apply to deem the proceeds on disposal of the shares to be capital in nature as it was held for more than three years (notwithstanding the fact that it was held with a speculative intention). The proceeds will thus not constitute gross income, but it will be subject to capital gains tax. (3)

CASE 4 (a) All of the relevant amounts will have to be included in Mr Fella’s gross income as Mr Fella is a

resident, he will in terms of the general definition have to include his world-wide amounts received or accrued where these amounts are non-capital in nature. Based upon the “tree v fruit” principle (CIR v Visser), all of the amounts will be seen to be “fruit” stemming from the underlying asset and, thus, constitute amounts of a revenue nature. (3)

(b) R

Local interest exemption (sec 10(1)(i)) 34 500 (1) Foreign dividend exemption (sec 10B(3)) R30 000 x 26/41 (will be dealt with in detail in tutorial letter 106) 19 024 (2) Local dividends – fully exempt (sec 10(1)(k)(i)) 80 000 (1) Royalty income – no exemption applicable to RSA residents nil 4

CASE 5 Mr Nerd has been awarded a bona fide bursary with a stipulation that he will be required to refund the full amount to his employer should he not be successful in his studies. In terms of section 10(1)(q)(i), such bursary will qualify for exemption and no portion thereof will therefore constitute income (gross income less exempt income) for the purposes of the Income Tax Act. (3) CASE 6 R R Immovable property in Spain (world-wide assets of resident are subject to CGT)

Proceeds 950 000

Less: Base cost: Cost

(230 000)

Selling costs (20 000)

Capital gain 700 000 700 000 (2) Flat in Camps Bay: Roll-over relief as disposed of to spouse: Par 67 – disregard any capital gain or loss. The base cost of the asset for his spouse will be R380 000

- (2)

There was a donation in terms of section 56 but it will be exempt, thus par 22 of the 8th schedule will not apply.

Aircraft exceeding 450kg: Excluded from personal-use asset (par 53). While capital loss will be disregarded under par 15, capital gain will not be excluded:

Proceeds 920 000

Less: Base cost (800 000)

Capital gain 120 000 120 000 (2) Listed shares: Disposal to a connected person: Treated as a disposal at market value (= actual pro-ceeds; no adjustment) ‘clogged” loss of R20 000 carried forward – par 39

Proceeds Less: Base cost Capital loss

100 000 (120 000)

(20 000)

-

(2)

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R R Gold coins: Excluded from personal-use assets (no exclusion – par 53(3)(a)))

Proceeds 97 500

Less: Base cost 80 000

Capital gain 17 500 17 500 (2)

837 500 Less: Annual exclusion (40 000) (1)

Aggregate capital gain 797 500 Less: Assessed capital loss brought forward (20 000) (1)

Net capital gain 777 500

Taxable capital gain: Inclusion rate of 40% x R777 500

311 000

(1)

13

40

QUESTION 2 20 Marks

Proposed self-assessment method


15 minutes

Attempt the Question, but commence with reading the REQUIRED. 30 minutes

Assess your answer with the help of the suggested solution. Identify where you made an error and refer back to the legislation and/or SILKE by making use of the references provided in the solution in order to re-affirm your knowledge and under-standing of the application of the legislation.

15 minutes

Ernst Easy (aged 48) was born in South Africa and is an internationally acclaimed professional golfer. He is married out of community of property to Fiona and they have 3 minor children who attend private schools in the United States of America (America). In 2006 Ernst emigrated from South Africa and has been living mostly in America for the past 10 years. He has a number of investments in South Africa and abroad and still owns a holiday house in Oubaai, a golf estate near George in the Republic. He is not a vendor for VAT purposes and cannot be regarded to carry on a business in the Republic. For the past 10 years Ernst spent an average of four months (from the first of November until the end of February) in South Africa, enjoying the fantastic climate, superb golfing facilities and outdoor life. During his stay in South Africa he would visit his friends and family, attend golf functions and golf clinics free of charge. Since his children have to attend schools, his wife only visits the Republic in December. During the 2017 year of assessment he had the following transactions and received the indicated amounts from the Republic: 1) On 31 March 2016 Ernst donated a house in Brakpan to his parents (both ordinary resident in the

Republic). He purchased this house exactly 10 years ago for the amount of R300 000. During 2007 he added a new garage to the house. This addition cost him R40 000. Ernst could have sold this house for R1 million on 31 March 2016.

2) On 5 May 2016 he won the South African Master’s golf tournament and received a net payment of R2.2 million in prize money.

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3) At the end of January 2017 Ernst received a net amount of R4.25 million from Golf Limited, who used his knowledge of golf courses to design a new golf course in Stellenbosch.

4) He received R7.6 million from international golf tournaments played (none of them in South Africa). 5) In September 2016 Ernst sold his holiday house in Oubaai, George for an astronomical value of

R14 million to Rupert Limited, a South African company. He initially acquired the house in 2009 for R6 million.

6) During the year of assessment ending 28 February 2017 he received the following dividends and interest from his investments in South Africa:

R “RSA Retail Saving Bonds” (offered by RSA government): Interest accrued on 31 December 2016 35 000 Net dividends received from Golf Limited on 31 January 2017 (15% withholding tax was deducted in terms of section 64E)

44 322

REQUIRED Marks

(1)

Briefly discuss, with reference to relevant tax legislation and case law, whether Ernst Easy is ‘ordinarily resident’ in the Republic for the 2017 year of assessment.

6

(2)

With regards to transactions 1 to 6, calculate the amounts that should be included in Ernst Easy’s taxable income for the 2017 year of assessment. Assume that he was a non-resident for the entire 2017 year of assessment. Provide a reason or refer to legislation, if any amount is excluded from, or has no effect on the calculation of taxable income.

Please use the table below in your answer:

14


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Query 1

‘Ordinary resident’ in the Republic is not defined in the Income Tax Act. Court cases should thus be examined.

(1)

In Cohen v CIR the following principle was laid down, namely that a person may be resident in more than one country at a time but the person can only be "ordinarily resident” in one country.

(2)

Ordinary residence is the residence in the country to which a person would naturally and as a matter of course return from his wanderings. His/her principle residence would be his/her real home.

(1)

CIR v Kuttel held that a person is “ordinarily resident” where he/she has his/her usual or principal residence, that is, what may be described as his/her real home.

(2)

The following circumstances could indicate that Ernst is not an “ordinary resident” in the Republic: Ernst emigrated to USA, thus his intention was to leave the Republic, (½) His lifestyle as an internationally acclaimed golf star would be to travel internationally, (½) His children attend school in the USA, (½)

He is physical present four months out of 12 months every year. His “physical presence” could not make him a resident because, even if he is in the Republic for more than 91 days during the current year and each of the preceding four years, in aggregate he is not in the Republic for more than 915 days (refer to note below).

bonus (1) Any other applicable reason Thus, the circumstances indicate that he regards his real home as the United States and, therefore, he is not ordinarily resident in the Republic (it cannot be said that the Republic will be his main and principle home).

(1)

(9½)

Note The physical presence test only applies to a non-resident not ordinarily resident in the Republic. It was not part of the required to discuss this issue.

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TAX4861/104

Query (2) (Also refer to summary 5.6.3 in this Tutorial letter)

Transaction

(1 to 6)

‘Gross income’

inclusion

Exemption

allowed/reason

Capital Gain/loss

R

Withholding tax levied and

reference to legislation

1. Donation of House

- - Proceeds R1 000 000 Base cost (R 340 000) [R300 000 + R40 000] (1) Gain R 660 000 There is no donation tax payable as he is a non-resident (bonus) (1)

-

2. Prize money received:

R2.2 m X 100/85 R2 588 235 (1)

Exempt ito s10(1)(lA) R2 588 235 (1)

- Ito s 47B: 15% X R2 588 235 R388 235 (1)

3. Golf Ltd: Imparting of commercial Knowledge

R4.25 m X 100/85 R5 000 000 (1)

Exempt ito s 10(1)(l): R5 000 000 (1)

- Ito s 49B(1)(b): R5 m X 15% = R750 000 (1)

4. Fees received from international Tournaments

Not from a Republic source (1)

- - -

5. Disposal of holiday house in Oubaai

- - Proceeds R14 000 000 Base cost (R6 000 000) (1) Gain R8 000 000

As a prepayment ito s 35A: 5% X R14 million = R700 000 (1)

6. Investments: - RSA Retail bonds

R35 000 (1)

Ito s 10(1)(h) as Not in Republic > 183 days and no business (1) R35 000 (1) Ito s 10(1)(k)

- No withholding tax ito s 50B interest on RSA retail bond (1)

(section 50D)

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Transaction

(1 to 6)

‘Gross income’

inclusion

Exemption

allowed/reason

Capital Gain/loss

R

Withholding tax levied and

reference to legislation

6. Investments: - SA Dividend

R52 143 (1) (44 322 X 100/85)

R52 143 (1)

15% ito s 64E (provided) R52 143 x 15% = R7 821

7. Aggregate capital gain/loss (bonus)

Aggregate capital gain R8 660 000

Annual exclusion (R 40 000) (½)

Taxable capital gain R8 620 000

Inclusion in gross income @ 40% (½)

(R8 620 000 x 40% = R3 448 000)

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TAX4861/104

SECTION C – SELF-ASSESSMENT ASSIGNMENT

PURPOSE STATEMENT:

In SECTION C you will find the self-assessment assignment, which you have to mark yourself. You have to assess your own knowledge and competencies and take responsibility for your own learning experience.

After completing the questions in the self-assessment assignment within the time limits provided, you should be able to:

Identify if you had rectified the shortcomings identified in the previous sec-tions; and

Demonstrate that you are competent to pass the formative assessments and summative assessment relating to the topics you have already covered so far.

Your assignment integrates your knowledge on under-graduate work as well as work done in TL103 and TL104. Work through the questions in the assignment and then assess yourself against the suggested solutions provided below in this section.

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A total of 12.5 hours of your study time is allocated to section C. The following time allocation for days 5 – 7 is recommended (Including reading time):


Day 5 – 26 February 2017 – 6 hours 30 minutes (Part 2)

Questions 1 to 8 390

Day 6 – 27 February 2017 – 3 hours

Questions 9 to13 (plus read through question 14) 180

Day 7 – 28 February 2017 – 3 hours

Questions 14 to16 180

Total (12.5 hours) 750

Proposed self-assessment method:

We have provided you with just over 9 hours of questions and you have 12.5 hours available. The questions in PART C are mostly integrated questions, on a level that we expect from a CTA 1 student. You have to integrate previous knowledge of your undergraduate studies with the previous tutorial letters done. Take your time in doing a question thoroughly instead of just looking at the proposed solution. We thus recommend:


15 minutes for every hour

Attempt the Question, but commence with reading the REQUIRED. 12.5 HOURS

Assess your answer with the help of the suggested solution. Identify where you made an error and refer back to the legislation and/or SILKE by making use of the references provided in the solution in order to re-affirm your knowledge and understanding of the application of the legislation.

1minute for every mark allotted

In addition, you have at least 15 hours of questions (with solutions) in your prescribed book, ADVANCED QUESTIONS ON SA TAX 2017 by Parsons et al that should be used for revision of your under-graduate knowledge. Remember to read the applicable case law relating to this tutorial letter in TL 102/2017.

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Summary of questions:

QUESTION AQSAT TOPIC MARKS/TIME

1 Question

supplied Source 30/45

2 Question

supplied

Gross income and capital gains tax

discussion 24/36

3 Question

supplied

Exempt income

21/32

4 Question

supplied

Gross Income (including source)

discussion 30/45

5 Question

supplied

Capital Gains Tax

8/12

6 9.7

Solution AQSAT

Ignore any double tax agreements for

purposes of question.

Assume a TABC of R5 453 333 and

R1 518 519 for the Gauteng house

and Arniston house respectively.

28/42

7 Question

supplied Gross Income and Capital Gains Tax 12/18

8 Question


9 Question


10 Question

supplied General deduction formula 16/24

11 Question

supplied Gross Income and general

deduction formula

15/23

12 Question

supplied General deduction formula 14/21

13 Question

supplied Extract 2014 Test 1 20/30

14 Question

supplied Extract 2013 Exam Question 45/68

15 Question

supplied

Test 1, 2015 40/60

16 Question

provided

Extract Test 1, 2016 20/30

* AQSAT refers to your prescribed textbook ADVANCED QUESTIONS ON SA TAX 2017 by

Parsons et al.

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QUESTION 1 30 Marks

PART 1 (7 Marks) Manley Blaine, a South African resident, owns a block of flats situated in Wynberg, Cape Town. He inherited the block of flats in terms of his father's (Mr Blaine Senior) will, executed in the United Kingdom. Mr Blaine Senior was, at date of death and throughout his adult life, ordinarily resident in the United Kingdom. YOU ARE REQUIRED TO: 1. State what is the source of the rentals received by Mr Blaine Senior. State whether the source

is determined in terms of s 9 or in terms of common law principles with appropriate explanations and reference to case law.

2. Assume the block of flats that Manley inherited were situated in the United Kingdom. How would Mr Blaine Senior and Manley Blaine be taxed on rentals received?

PART 2 (5 Marks) Adrie Spaans, ordinarily resident in the Netherlands, designed a model pattern that was used to teach the art of tailoring. She had developed this pattern in the Netherlands. Due to its popularity in the Netherlands she visited South Africa and marketed her product here. In the current year of assessment Adrie received payments amounting to R120 000 from various design schools in South Africa that used the pattern as a teaching aid. YOU ARE REQUIRED TO: Discuss whether the R120 000 received would be taxed in South Africa or not, indicating the source of the income with reference to section 9 of the Income Tax Act or common law principles as appropriate. PART 3 (9 Marks) A leading lung specialist (a SA resident) in private practice in the Republic of South Africa was flown to a Central African State to perform an operation on one of their top ministers. The president (of the African State) sent his private jet to fetch and return the specialist. All his expenses were paid and, although he did not wish to be paid for his services, the government of the African State insisted on paying him the equivalent of R100 000. YOU ARE REQUIRED TO:

1. Explain where the source of the income would be.

2. Explain with reasons whether the lung specialist will be taxed on the amount in the Republic of South Africa.

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PART 4 (9 Marks) Chancer, a SA resident, occupied a position that required him to be entrusted with funds to be used for secret operations. Over a number of years he appropriated funds to himself and, in total, took about R450 000 from the trust fund. Chancer was ultimately caught, charged and ordered to repay the whole amount, which he subsequently did. Chancer was then assessed to tax on the amount he had stolen. Chancer objected to this assessment on the grounds that the amount was not ‘received’ by him and was therefore not gross income. YOU ARE REQUIRED TO: Discuss whether the R450 000 was or was not ‘received by’ Chancer. Refer to case law where appropriate.


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Part 1 - Manley Blaine

1. There is no specific source rule in terms of s 9(2) for rent received on fixed property and also not a specific exclusion in terms of s 9(4). The common law principles need therefore to be applied. The source of the rental income in terms of common law is South Africa. The originating cause of rentals being received is the block of flats located in Cape Town i.e. where the taxpayer's capital is employed. (COT v British United Shoe Machinery).

(4)

2. Mr Blaine Senior : The rent received from fixed property situated in the United Kingdom is not from a source in the Republic in terms of s 9. The common law source of the rent is in the United Kingdom where the flats are situated.

(2)

Manley Blaine: Since Manley is a SA resident in terms of the gross income definition he would include the rental income in gross income in both cases.

(1)

(7)

Part 2 - Adrie Spaans

In terms of s 9(2)(c) a royalty paid by a resident is from a source in the Republic (unless the royalty is attributable to a permanent establishment which is situated outside the Republic). In terms of s 9(2)(d) a royalty is from a source in the Republic if the intellectual property is used in the Republic.

(1)

The R120 000 is therefore from a source in the Republic and is included in Adrie's South African gross income.

(1)

In terms of s10(1)(l) the royalty will be exempt from normal tax unless Adrie is physically present in the Republic for > 183 days during the 12 months before the royalty is received or accrues OR if the royalty is attributable to a permanent establishment of Adrie in the Republic.

(1)

The royalty received by Adrie from a source in the Republic is subject to a final withholding tax in terms of s49B(1). From 1 January 2015 the withholding rate is 15%. If s49B(1) is applicable, the royalty will be exempt from normal tax in terms of s10(1)(l).

(1)

If Adrie is physically present in the Republic for > 183 days during the 12 months before the royalty is received or accrues OR if the royalty is attributable to a permanent establishment of Adrie in the Republic and Adrie is registered as a taxpayer in the Republic, then the royalty is exempt from withholding tax in terms of s49D and the s10(1)(l) exemption falls away. The royalty will then be subject to normal tax in SA.

(1)

(5)

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Part 3 - Lung Specialist

1. In order to establish the source of the income it is necessary to apply s 9. There is no source rule in s 9 for services rendered by an independent contractor.

To establish the common law source of the income it is necessary to determine the originating cause i.e. why the amount was received. There could be two originating causes i.e.

- practice of the doctor located in South Africa or

- the services rendered in the African state (2) When confronted with a multiplicity of originating causes it is necessary to identify the

dominant cause (Black). It is submitted that the most proximate cause is the rendering of the services and the source is therefore the Central African State.

(3)

2. Since the specialist is a SA resident, the gross income definition includes all amounts received in his gross income, irrespective of their source.

(1)

A second issue concerns the capital or revenue nature of the receipt. It could be argued that because no payment was requested, the amount is fortuitous and therefore of a capital nature. However paragraph (c) of the gross income definitions includes any amounts received in respect of services rendered whether they are of a capital nature or not.

(3)

(9)

Part 4 – Chancer

An amount is 'received by' for the purposes of the gross income definition in section 1 of the Income Tax Act, if the taxpayer received the amount on his own behalf and for his own benefit. (Geldenhuys)

(2)

However, Chancer illegally appropriated about R450 000 of these funds for himself. This constitutes an illegal receipt.

(1)

There are several conflicting judgements in respect of illegal income.

The Delagoa Bay Cigarette Co. Ltd ran an illegal lottery. This case introduced the principle that in determining whether an amount is 'income' or not, no account must be taken of the fact that the activity involved was illegal, immoral or ultra vires - the source of the income (whether legal or illegal) is immaterial.

(2)

In COT v G 1981 (4) SA 167 (2A) it was held that amounts stolen by a thief are not

'received' by the thief within the meaning of the definition of 'gross income', since it was not willing given by the person from whom the money was taken. It was therefore a unilateral receipt.

(1)

MP Finance Group CC ran an illegal pyramid scheme, whereby it took money from

'investors' under false pretences. It was held that an amount will be regarded as having been 'received' by the taxpayer for the purposes of the gross income definition if the taxpayer has intended to receive it for his own benefit, and these amounts were considered taxable. Critics of this judgment note that the taxpayer failed to argue that in order for there to be 'receipt', the intention of the person making the payment must be taken into account, which was central to the decision in COT v G. If this argument had been made the outcome may have been different.

(2)

It is therefore unclear whether Chancer would be subject to tax on the amounts that he has stolen.

(1)

(9)

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You have been approached by Mrs Good for tax advice regarding the sale of fixed property that she owns. In 1990 Mrs Good inherited a large sum of money from her late father. She used the money to purchase a block of flats in Durban. The flats were acquired in 1992 at a cost of R1.5 million. Mrs Good has derived rental income from the flats for the past 24 years. Mrs Good has now decided to sell the block of flats because she is getting old and is in poor health. She has consulted a prominent estate agent who has advised her that she could sell the property in one of two ways. She could sell the entire block as one property in its present condition. Alternatively, she could divide the block into sectional title units and sell the flats individually. The estate agent estimates that the selling price of the block as a single property will be R10 million. He has told her that if she spends R1 million on upgrading the building and opening a sectional title register she can expect to sell the flats for R15 million. Mrs Good is a South African resident and is not a VAT vendor. YOU ARE REQUIRED TO: Advise Mrs Good on the income tax consequences of the sale of the property either as a single property or as sectional title units.

QUESTION 2 24 Marks

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Mrs Good

The sale of the flats will give rise to proceeds of either R10m or R15m depending on the mode of sale.

The income tax consequences will depend on whether or not the proceeds are gross income. (1) If the proceeds are gross income the full amount will be subject to income tax. An adjustment has to be made as a capital asset has become trading stock. A capital gain will be calculated on the market value less base cost at the time of change of intention and 40% of this capital gain will be taxed. The market value will be included in opening stock for deduction against the revenue proceeds.

(2)

If the proceeds are not gross income the amount will be subject to capital gains tax, in which case only 40% of the capital gain will be taxed.

(2)

It is therefore important to determine whether or not the proceeds are included in gross income.

Gross income is a defined term. In terms of the definition all of the following criteria must be fulfilled:

i. There must be an amount. In Mrs Good's case there is clearly an amount i.e. either R10m or R15m.

ii. The amount must be in cash or otherwise. Mrs Good will presumably be paid in cash.

iii. The amount will only be included in Mrs Good's gross income when it is received by her or accrued to her.

iv. The amount must not be of a capital nature. (2)

Clearly requirements (i) to (iii) will be met, and the only issue is the question of the capital or revenue nature of the proceeds.

(1)

Capital receipts are the consequence of the disposal of a capital asset which was acquired as an investment. Revenue receipts are the consequences of a scheme of profit making.

(1)

Whether Mrs Good holds the flats as a capital or revenue asset will depend on the purpose for which she holds the asset.

(1)

The courts (Stott) have held that it is necessary to establish the intention of the taxpayer at the time of acquisition. If intention at the time of acquisition is capital and there is no subsequent change of intention, the proceeds are capital (Stott).

(2)

Mrs Good's intention at the time of acquiring the flats is established by asking her what her intention was (Malan). (SARS will ask her and) her answer to the question is her ipse dixit (i.e. 'what she says').

(1)

The courts have held that the taxpayer's ipse dixit must not be taken lightly, and must be supported by the circumstances. The veracity of the taxpayer's ipse dixit will be tested by taking into account the surrounding facts.

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The factors that will be taken into account are:

Length of time that the asset was held. In Mrs Good's case the flats were owned for more than 20 years which supports a capital intention.

Frequency of property dealings. Assuming this is only property sale that Mrs Good has made the inference is one of capital.

The flow of income. Mrs Good has received rental income for 24 years.

The reason for the sale. Mrs Good is in poor health. (2)

All indications are that Mrs Good's original intention was one of a capital nature and in the absence of a change in intention the proceeds will be of a capital nature.

(1)

The courts (Stott) have held that every person is entitled to realise their capital asset to the best advantage. Furthermore it has been held that the mere decision to sell does not in itself intimate a change of intention (John Bell).

(2)

A change of intention occurs when the taxpayer does something more than merely realise an asset to best advantage. The taxpayer's actions must metamorphose the asset and turn it into trading stock (John Bell). The taxpayer must cross the Rubicon and go over to a business of property dealing (Natal Estates).

(2)

If the property is sold as a single unit there is clearly no evidence of a change of intention. (1)

If the sectional title method is used there could be evidence of a change of intention. The R1m expenditure clearly complicates the situation.

In Stott's case it was held that a person, in realising an asset to best advantage, is entitled to accommodate the asset to the exigencies of the market in which it is being sold. By selling as sectional title units Mrs Good is merely disposing of her capital asset in the most appropriate way. Sectional title is the commercially sound method of sale.

If the expenditure is merely to accommodate the sectional title sale it should create no problem (Berea West).

(1)

If however the R1m is spent to change the character of the property in order to make a bigger profit Mrs Good could be seen to have had a change of intention.

(1)

On balance, the evidence suggests that Mrs Good acquired the property with a capital intention and has not subsequently changed her intention. The amount received on sale should therefore be excluded from 'gross income', and she should recognised a capital gain.

(1)

(24)

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QUESTION 3 21 Marks

The following four case studies relate to exempt income: 1. Dickey Bird is employed as a pilot by South African Airways. During his 2017 year of

assessment, he was paid R65 000 per month. He was physically outside South Africa for a total of 190 days during this period. At no stage was he outside South Africa for a continuous period of more than 60 days.

2. Themba Njalo, a SA resident, is employed as a mineworker, while his wife Valencia, to whom

he is married out of community of property, works as a marketer for the mine. During his 2017 year of assessment his employer gave him a miner’s uniform with a market value of R400. From 1 March 2016 they also gave his wife a clothing allowance of R500 per month.

3. Mr and Mrs Fred Couple, married out of community of property and both South African

residents, are both employed by the same company. During April 2016 they were both advised that they would be transferred from the Johannesburg branch of the company to the Cape Town Branch. Mr Couple was transferred on 1 August 2016. He commenced work and moved into the Cape Town Holiday Inn from that date. The company paid the cost of his flight, R2 200 and also the costs of his accommodation at the hotel, for which the hotel charges him R6 000 per month. Mrs Couple flew down to join him in the hotel and at work on 15 January 2017. The company paid for the cost of her flight, R1 800 and the costs of both Mr and Mrs Couple’s accommodation in the hotel, for which the hotel charges R12 000 per month. The company also paid all costs relating to the transportation of the household effects to Cape Town, which cost R41 500 and the estate agent’s commission on the sale of their Johannesburg house, which amounted to R75 000. Mr and Mrs Couple purchased a house on 20 January 2017 and moved into it on 15 February 2017.

4. Ian Vester deposited R100 000 in a South African financial institution (a ‘bank’ as defined in

s 50A) on a fixed deposit at eight per cent per annum with interest payable monthly from 1 July 2016. Ian is not resident in South Africa, having immigrated to Australia in 2010. During his 2017 year of assessment, he also earned royalty income of R120 000 from sales of a book in South Africa which he had written in Australia.

YOU ARE REQUIRED TO: Discuss which amounts will constitute income for the taxpayers named in the above cases, in respect of their 2017 years of assessment.


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(1) As a South African resident, the amount received forms part of his gross income.

Section 10(1)(o)(ii) allows an exemption if the employee is outside the Republic for an aggregate of 183 full days in any period of 12 months, which must include a continuous period of 60 full days. This is not the case here therefore his salary is not exempt.

(2)

(2) Section 10(1)(nA) would exempt the value of the uniform received in the case of

Themba, but the exemption would not apply in the case of Valencia since her clothing is not a uniform (i.e. not separately distinguishable from everyday wear).

(2)

(3) The exemption in section 10(1)(nB) would apply to the costs of the flight, transporting

their household and personal goods, costs of the sale of the previous residence and of hiring hotel accommodation (this latter exemption for a maximum period ending 183 days after the date from which the transfer takes effect). Although Fred's period of 183 days ends on 31 January 2017 (which is 183 days after 1 August 2016), from that date, Mrs Couples' accommodation exemption would cover him since the exemption is for the employee and members of her household. (During this period Mrs Couple is exempt on her portion of the costs as this is within 183 days of her appointment). All costs would be exempt. Hence no taxable portion.

(5)

(4) In terms of section 9(2)(d), the use in South Africa has the effect that the royalty is from

a source within the Republic and therefore 'gross income'. Royalties received by a non-resident from a source in the Republic are subject to a final withholding tax of 15% from 1 January 2015. Royalties is withheld i.t.o s49B(1) (It was 12% before this date). However, if section 49B(1) is applicable, the royalty should be exempt from income in terms of s10(1)(l), as long as the person is not physically present in the Republic for > 183 days in aggregate during the 12 month period preceding the payment of the royalty and at no time during the 12 month period preceding the accrual of the royalty did the person carry on a business through a permanent establishment. It is submitted that the mere earning of royalty income does not constitute the carrying on of a business through a permanent establishment.

(5)

Ian is a non-resident. The interest received is from a source within the Republic (section

9(2)(b)) and therefore falls into gross income. The interest is exempt in terms of section 10(1)(h) if Ian is not physically present in the Republic for > 183 days during the 12 month period preceding the accrual of the interest nor carrying on a business through a permanent establishment.

(2)

A final withholding tax on interest of 15% is levied in terms of section 50B(1) for interest

received by a non-resident from a South African source. This withholding tax is not applicable to interest received from a Bank – exempt in terms of section 50D.

(5)

(21)

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QUESTION 4 30 Marks

PART 1 (5 Marks) Andrew Stein, a SA resident, runs a new and second-hand furniture shop. During the current year of assessment, he sold a dining-room suite to a customer for R15 000. It was agreed that Andrew would accept the customer's antique sideboard in settlement of the purchase price. The market value of the sideboard at the time was R20 000. Andrew had desired the sideboard as a birthday gift for his wife and had therefore agreed to the transaction. Before Andrew could transport the sideboard to his home a regular customer offered him R25 000 for the sideboard. Andrew could not resist the offer and sold it to the customer for R25 000 cash. YOU ARE REQUIRED TO: Determine Andrew's gross income as a result of the above transactions. Give reasons for each inclusion or exclusion from gross income. (Ignore VAT.) PART 2 (8 Marks) Michael Lang, a SA resident, was interested in purchasing 15 hectares of land for his retirement. He intended to live there and grow flowers and herbs for sale to local markets. He found a suitable area that was for sale, but the seller was only interested in selling 20 hectares or nothing. Mr Lang felt this was the ideal site and purchased the 20 hectares. He thereupon immediately sold five hectares for R2 million, making a profit of R500 000 and proceeded with his retirement plan in respect of the remainder of the property. At the end of the same year he received R45 000 in respect of flowers and herbs sold. YOU ARE REQUIRED TO: Discuss the inclusion or exclusion of the R2 million and R45 000 in Michael Lang's gross income. (Ignore VAT.)

PART 3 (12 Marks) Mr Zeller invented an ingenious and efficient structure to support bicycles on the back of a car without using a tow hitch and which was permanently attached to the car’s boot. Mr Zeller was not a resident of the Republic. Mr Zeller took part in the Cape Town Cycle Tour two years ago. Whilst in Cape Town he developed the ideas and plans for his structure. Various firms were interested in selling and fitting this structure to cars. Mr Zeller registered his patent and subsequently received gross royalties of R4 million from firms in South Africa and R1 million from companies registered and managed in Europe who used this structure in Europe (from 1 July 2016 to 28 February 2017). Before the end of the 2017 year of assessment, a South African firm offered to buy the patent outright from Mr Zeller for R20 million. Mr Zeller accepted this offer and all legal formalities for the sale went through before the year-end. Mr Zeller received the R20 million on the first day of the next year of assessment. YOU ARE REQUIRED TO: Determine what amounts will be included in Mr Zeller's gross income in the 2017 year of assessment. Give brief reasons for each amount whether included or excluded. (Ignore VAT.)

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PART 4 (5 Marks) Jane Murray is a SA resident who retired from a South African employer on 29 February 2016. She had also worked for an American firm AmerCo for 30 years. Jane headed the South African branch of AmerCo (in Johannesburg) from 1 January 2008 to 31 December 2009. She retired from AmerCo on 31 December 2009. On retirement, Jane was informed that AmerCo would pay her a pension of R400 000 per annum in respect of her 30 years’ service to the company. Jane had become ordinarily resident in the Republic from 1 January 2012. In addition to her pension, Jane received interest on a deposit in an American bank. This amounted to R200 000 for the 2017 year of assessment. YOU ARE REQUIRED TO: Determine the amount (if any) to be included in Jane Murray’s gross income for the 2017 year of assessment.



PLEASE NOTE Part 3: Assume that there will be no recoupment in terms of section 8(4)(a).

Part 1 - Andrew Stein

(a) Sale of a dining-room suite (gross income)

R20 000 (1)

Andrew is trading in the sale of furniture. In terms of the gross income definition, an “amount in cash or otherwise” must be included in gross income. (Lategan; People's Stores). The sideboard must be valued on date of acquisition. (Lace Proprietary Mines). Andrew must include R20 000 in his gross income.

(1) (1)

(b) Sale of sideboard nil

This sale was a fortuitous offer which was not sufficient to change Andrew's true intention on acquisition. Alternatively, SARS could decide that there was a change of intention and that the transaction was in the ordinary course of business (based on the type of business Andrew Stein ran). Note that in terms of section 102 of the Tax Administration Act, the onus would be on Andrew to show that the amount was capital.

(2)

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Part 2 - Michael Lang

(a) To establish whether the amount of R2 000 00 is gross income as defined the intention of Michael when he acquired the asset and during the holding period and the time he disposed of the asset must be taken into account. The ipse dixit (the taxpayer’s own evidence) will be taken into account. However the credibility of his statement will be considered taking the objective surrounding factors into account. (The facts of this part are similar to the Stott case.)

(3)

Objective factors to be taken into account:

Michael acquired the land as investment.

He has no intention of acquiring additional land to make a profit but the

only way to acquire the land was to purchase all 20 acres.

There was no change of his original intention to acquire land as an investment.

The length of time held will be irrelevant in this case.

The sale of 5 acres (R2 million) of the 20 acres will be capital in nature and subject to capital gains tax

(3)

(b)

The sale of flowers and herbs will be revenue in nature (fruits of labour). An amount of R45 000 will be included in Michael’s gross income. (Refer to the Visser case)

(1)

This is income produced from capital employed (use of land). (1)

Part 3 - Mr Zeller

(a) Royalties received ((1/07/2016 to 28/02/2017)

Royalties paid by SA resident R4 000 000 Source in terms of s 9(2)(c) and (d) - Royalties paid by SA resident (2)

From firms in SA – source is determined by the party paying the royalty (s9(2)(c))

This amount will however be exempt in terms of s 10(1)(l) and subject to a final withholding tax of 15%. (R4 000 000)

(1)

Royalties paid by foreign companies for use of patent outside SA Rnil (1)

Not from a source in SA in terms of s 9(2)(c) or (d) and deemed by s 9(4)(c) to be from a source outside SA.

From companies in Europe – source of the royalty is determined by the place where the intellectual property is used (s 9(2)(d)). It is used in Europe, thus no inclusion of the R1 million in terms of section 9(2)(d). Rnil

(1)

(b) Sale of patent (R20 million) capital in nature because: Rnil (1)

1. Once all the legal formalities have been complied with, the amount has accrued. It does not matter that the amount was received in the next tax year.

(1)

2. Sale of income producing machine. The patent generated the income i.e. it was a capital asset (Visser — tree and fruit analogy).

(1)

3. The patent is not trading stock (Mr Zeller does not deal in patents)

(1) 4. Patent itself not sold in a profit making scheme (Pick 'n Pay Employee Share

Trust)

(1)

However, because Mr. Zeller is a non-resident and the patent is not immo-veable property in the Republic, it will not be a capital gains tax event in terms of the Eight Schedule

(2)

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Note: Royalties received by a non-resident from a source in the Republic are subject to a final

withholding tax of 15% for royalties i.t.o. s49B(1). However, if section 49B(1) is applicable, the royalty may be exempt from further tax in terms of section 10(1)(l).

I.t.o. section 10(1)(l) the exemption will only be allowed if he was out of Republic for more than 183 days (alternatively he should not have been physically present in the Republic for more than 183 days) in the preceding twelve-month period in which the royalty is received or accrued.

Part 4 - Jane Murray

R

1. (a) Gross income (world-wide income)

400 000 (1)

Less: Foreign pension (s10(1)(gC)) 28/30 x 400 000 = (373 333)

(1)

In terms of the ‘gross income’ definition, Jane must include her worldwide receipts and accruals into ‘gross income’, but 28/30 x R400 000 is regarded not to be from a source within the Republic and therefore sub-ject to the section 10(1)(gC) exemption.

(1)

(b) Foreign interest

200 000 (1)

No interest exemption available for foreign interest, s 10(1)(i) is only applicable to interest from a source in SA.

(1)

30

QUESTION 5 8 Marks

Mr Sanders (a resident in South Africa and unmarried) acquired a residence on 1 November 2003 for R800 000 and lived in it as his primary residence for eight years after that date. During this period he operated a small computer business from the premises using 40% of the area for this purpose. The business expanded to such an extent that he decided to buy another house to use as his primary residence. The existing house was then used exclusively for the purposes of the computer business. After a further five years, during which time he spent a further R300 000 on improvements to the premises used for the business, he sells it for R2 600 000 on 1 November 2016. YOU ARE REQUIRED TO: Calculate the net capital gain to be included in the taxable income of Mr Sanders for the year of assessment ended 28 February 2017.

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Mr Sanders R

Proceeds - par 35(1) 2 600 000 (1)

Base cost para 20(1)(a) and 20(1)(e) (R800 000 + R300 000) (1 100 000) (1)


Less: 5/13 years not ordinarily resident in premises - par 47 (576 923) (1)

923 077

Less: 40% business use for initial period - par 49 (369 231) (1)

553 846

Less: Primary residence exclusion R2m limited to actual - par 45 (553 846) (1)

Primary residence capital gain / loss nil

Capital gain on disposal of property

Primary residence nil

Business use (taxable) 369 231 (1)

Period not used as primary residence (taxable) 576 923 (1)

Capital gain (total as only asset sold) 946 154

Less: Annual exclusion (40 000) (1)

Aggregate capital gain 906 154

No assessed capital loss brought forward nil


(8)

Note:

The profit is subject to capital gains tax. A maximum primary residence exclusion to the amount of R2 000 000 is allowed as a deduction against the capital gain. However this exemption cannot apply when the property is not used for primary residence purposes only, for example the letting of the property or the use of the property for trade purposes. The taxpayer is penalised and the taxpayer cannot claim the exemption on the full capital gain. The capital gain is calculated as follows: Capital gain before the primary residence exclusion R1 500 000 less the allowable portion of the primary residence exclusion of R553 846. The capital gain is R906 154.

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QUESTION 6 SUGGESTED SOLUTION AQSAT 9.7

PLEASE NOTE

Ignore any double tax agreements. Assume a TABC of R5 453 333 and R1 518 519 for the Gauteng house and Arniston house respectively.

Mr Garnet Boswell In terms of s 9H(2)(b) & (c), where a person ceases to be resident, that person's year of assessment is deemed to end on the day immediately before he ceased to be resident, and the next year of assessment begins on the day on which he ceased to be resident. Garnet Boswell's year of assessment therefore ends on 31 July 2016. His next year of assessment begins on 1 August 2016, and ends on 28 February 2017. (1) 1.

Transactions to date of emigration: 1/03/2016 to 31/07/2016

CGT R

Income Tax R

Donation of golf cart to the golf pro

Opening stock

(75 000) (1)

S 22(8) recoupment - no deemed output for VAT purposes (still for enterprise purposes)

150 000

(1)

S 22(8) proviso determines that if trading stock is used in carry-ing on his trade, it will deemed to be expenditure, thus, it can be deducted as advertising expenditure

(150 000)

(1) Capital gains tax:

Gauteng residence (no deemed disposal in terms of section 9H(4) on date of emigration - immovable property situated in RSA)

nil

(1)

Furniture and fittings (personal-use asset in terms of par 53) nil

(1)

Australian house

Deemed proceeds on ceasing to be resident-s 9H 3 000 000

(1)

Base cost (R3 200 000 less repairs – par 20(2)(b))

(2 500 000)

(1)

Capital gain

500 000

The R700 000 is a repair and not added to base cost (par 20(2)(b))

Arniston house (no deemed disposal in terms of section 9H(4) - immovable property situated in RSA) nil

(1)

Trading stock (no disposal as it’s an asset attributable to a permanent establishment in the Republic – section 9H(4)(c)) nil

(1)

Total capital gains 500 000

Less annual exclusion (40 000) (1)


Inclusion at 40% 184 000 (1) Net effect of transactions for year of assessment ended 31 July 2016 109 000

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2. Transactions after becoming a non-resident R R

Sale of Gauteng house: 30 December 2016

Proceeds – par 35(1)

11 000 000

Base cost:

The most beneficial valuation date value: i) Valuation date value (1/10/2001) of R8 000 000; or ii) 20% of R11 million = R2,2 million; or iii) Time-apportionment base cost of the asset:

(1)

TABC: R600 000 + ((11 000 000 - 600 000) x 14)/30 =R5 453 333

(2)

Thus, use market value 1 October 2001 (8 000 000)

(1)

There is no apportionment of gain for period of non-residence or period not ordinarily resident - deemed ordinarily resident despite absence in terms of par 48(a)

(1)

Total gain: 3 000 000

Gain relating to primary residence (2 hectares)

Residence gain: R4 million/R11 million x R3 000 000 1 090 909 (2) Land (max 2 hectares):

R7m/R11m x R3 000 000 x 2 hectares/5 hectares 763 636

(2)

1 854 545

Less: Primary residence exclusion R2 million limited to (1 854 545)

(1)

nil

Remaining land: R7m/R11m x R3 000 000 x 3 hectares/5 hectares 1 145 455

(1)

Gain on sale of Johannesburg house 1 145 455

Sale of Arniston house: 12 January 2017

Proceeds

3 000 000

Base cost: (no valuation date value provided) 20% of R3 million = R600 000 or TABC: R500 000 + [(3 000 000 - 500 000) x 11]/27 (1 518 519)

(3)

Capital gain

1 481 481

Total capital gain (R1 145 455 + R1 481 481) 2 626 936

Less: annual exclusion

(40 000)

(1)

Net capital gain

2 586 936

Inclusion @ 40%

1 034 774 (1)

Total marks 28

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QUESTION 7 12 Marks

You have been approached by Smoke CC (a resident of the Republic) with regards to the normal tax implications stemming from the following transactions. You have to provide an answer to each of these questions individually. Where appropriate, provide reasons to justify your answer. You must ignore value-added tax implications. SMOKE CC 12 marks Smoke CC is a small manufacturer who suffered a loss due to a fire, which swept through its leased industrial building during the current year. In response to this, the corporation submitted a claim against its insurers for damage that was caused and the following summarises their claim and subsequent insurance pay-out received in this regard: R Compensation for raw materials (trading stock) destroyed 20 000 Compensation for manufacturing machine destroyed 50 000 Compensation for loss of profits 30 000 Total 100 000 The machine that was destroyed had originally been acquired by the corporation at a cost of R40 000, while its tax value (cost less accumulated allowances) on the date of the fire amounted to R10 000. You may assume that the corporation utilised the full insurance proceeds to supplement its working capital and that the corporation did not dispose of any other assets during this year.

REQUIRED: MARKS

1. Explain whether the insurance pay-out would give rise to any amount of gross

income in the hands of Smoke CC in respect of the current year of assessment and, if so, calculate the amount thereof.

2. Explain whether the insurance pay-out would give rise to any taxable capital gain

for Smoke CC in respect of the current year of assessment and, if so, calculate the amount thereof.

(7)

(5)

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SMOKE CC Part 1 Gross income will only arise where an amount of a revenue nature is received, unless, the amount is covered by a special inclusion in gross income (special inclusions also encompass amounts of a capital nature). In order to determine the capital or revenue nature of payments for damages and compensation, one would have to establish whether the amount was received to fill a hole in the capital asset (capital) or in the profits (revenue) of the recipient (Burmah Steamship Co Ltd v IRC). The following amounts will thus form part of gross income: (2) R Compensation for trading stock – fill hole in profits (revenue) 20 000 (1) Compensation for machine – fill hole in capital asset (capital) nil (1) Recoupment of previous allowances (special inclusion): Smoke CC received compensation of R50 000 (refer to section 8(4)(a) The recoupment is (limited to original cost of R40 000 – the tax value of R10 000) 30 000 (2) Compensation for loss of profits – fill hole in profits (revenue) 30 000 (1) Gross income 80 000 Part 2 As there was a disposal (scrapping, loss or destruction) of an asset, Smoke CC will have to account for a taxable capital gain which is calculated as follows (note that any amount already taken into account as part of gross income is excluded from the capital gain calculation): (1) R R Proceeds received - machine 50 000 Less: Amount included in gross income (recoupment) (30 000) 20 000 (1) Base cost - machine 40 000 Less: Allowances claimed for normal tax (30 000) (10 000) (1) Capital gain 10 000 Less: Annual exclusion (company) - (1) Aggregate capital gain 10 000 Taxable capital gain: 80% x R10 000 (no roll-over as proceeds are not invested in a replacement asset) 8 000 (1)

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QUESTION 8 25 Marks

PART A 7 marks Allan Breker (a 45 years old resident of the Republic and married out of community of property to Nerina) is one of the directors of Test (Pty) Ltd. On 13 May 2017, Allan approached you for assistance in relation to his 2017 tax return. Allan Breker provided you with the following information:

He received a basic salary of R30 000 per month for the tax year.

Much to his wife’s annoyance, the company sent him to Armenia (ignore any double taxation agreement) from 1 July 2016 until 31 January 2017, to launch a new product. He spent every last week-end of the month as well as 12 September until 18 September 2016 (to attend his daughter’s birthday), as well as 22 December 2016 until 1 January 2017 in South Africa. He has been in Armenia for 187 days in aggregate during the year of assessment.

On 1 February 2017 Allan Breker used R360 000 of his inheritance (his mother died in August 2016) to purchase a lifetime annuity of R28 800 per annum from an insurer. It will be paid to him at an amount of R2 400 per month. The first R2 400 was paid to him on 28 February 2017. His life expectancy (based on the life expectancy tables) is 25,38 years.

REQUIRED Marks

Calculate Allan Breker’s taxable income for the 2017 year of assessment, showing clearly with reasons which receipts and accruals are exempt from taxation.

7

PART B 18 marks Don and Dawn Smith have been married in community of property for more than 25 years. Don is an orthopaedic surgeon while Dawn is an interior decorator. They have decided to do some serious estate planning, given Don’s retirement within a few years. They have approached an independent certified financial planner to assist them in this regard. He has requested them to each prepare a detailed list of all the assets and investments that they currently possess, stipulating the original cost, the current market value and whether or not the assets/investments had been valued on 1 October 2001. Once presented with such a list, he will propose a restructuring of their current joint estate. Don and Dawn like to spend their holidays at their bushveld lodge close to Bela-Bela. Don inherited this bushveld lodge on 18 November 2010 from the estate of his late mother. The property was transferred into his name on 18 November 2010 and had a market value of R1 350 000 on that date, this amount will also be its base cost. The last will of Don’s mother stipulated that the bushveld lodge may never become part of any joint estate Don might be party to. Don has made capital improvements of R150 000 during November 2011 at the bushveld lodge. He has all the relevant substantive documentation to prove the cost. Don started to practice as an orthopaedic surgeon long before he and Dawn got married. Don has started to scale down his practice, but it is still an active practice. Don is a sole practitioner. Don is also advertising to sell his practice. He envisages that the possible proceeds from such a sale would realise R1 200 000. He had a good number of enquiries from young orthopaedic surgeons interested in purchasing his practice.

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The following list of assets and investments was prepared by Don as at 31 December 2016: Description

Original cost

Market value on 1/10/2001


R R R 2008 BMW 740i 450 000 - 425 000

1980 MG Sport (not used for business) 40 000 220 000 250 000

Ski boat (13 meters) 150 000 200 000 250 000

Paintings at his residence 50 000 300 000 380 000

Listed shares portfolio (in the Republic) 220 000 300 000 450 000

Bushveld lodge Base cost of

lodge is R1 350 000

Not applicable 2 100 000

Krugerrands (regarded as an investment for income tax purposes)

30 000

100 000 150 000

Antique furniture (not used for trade) 45 000 90 000 150 000

Practice (with active business assets) – sole practitioner

350 000

650 000 1 450 000

Primary residence 350 000 1 200 000 2 500 000

The independent certified financial planner suggested the following restructuring to these assets/investments:

Sell the 1980 MG Sport for R250 000 and invest the proceeds in a townhouse for earning of future rental income.

Sell the ski boat for R250 000 and invest the proceeds in a townhouse for earning of future rental income.

Sell the paintings for R380 000 and settle the outstanding balance of the hire purchase agreement on the 2008 BMW 740i.

Sell 60% of the listed share portfolio (held for speculative purposes) for R270 000 and invest the proceeds in preference shares.

Sell the bushveld lodge for R2 100 000 and invest 50% of the proceeds in commercial rental pro-perty and 50% in entry level residential rental properties

Sell the Krugerrands for R150 000 and invest the proceeds in government bonds.

Sell the antique furniture for R150 000 and invest the proceeds in a money market account.

Sell the practice for R1 450 000 (as a going concern) and invest the proceeds in student flats close to the local university to generate rental income. The practice will not be sold on credit terms. You may assume that there will be no recoupments on the depreciable practice assets included in the sale of the practice. You may also ignore any VAT implications on this transaction.

Don has accepted all the suggestions of the independent certified financial planner regarding the selling of “his” assets and investments to restructure their joint estate.

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The following list of assets and investments was prepared by Dawn as at 31 December 2016: Description Original cost Market value on

1/10/2001


R R R 2001 Toyota Tazz 70 000 55 000 35 000 Listed shares (in the Republic) – long-term investment

150 000 350 000 600 000

Persian carpets – part of household carpets

65 000 150 000 190 000

Household furniture 250 000 350 000 400 000 The independent certified financial planner suggested the following restructuring of these assets and investments:

Sell 60% of the listed share portfolio for R360 000 and invest the proceeds in a money market account.

Sell all the Persian carpets for R190 000 and invest the proceeds in a money market account. Dawn has accepted all the suggestions of the independent certified financial planner regarding the selling of “her” assets and investments to restructure their joint estate. Both Don and Dawn have decided to adopt the market value of their respective assets and investments as at 1 October 2001, as the valuation date value thereof. All assets and investments will be sold and realised during February 2017, for their respective market values as at 31 December 2016. Don has an assessed capital loss of R10 500 brought forward from the 2016 tax year. Don is currently 56 years old and Dawn 54. Except for his own practice, Don has never had any other business, practice, business interest or practice interest in the past.

REQUIRED Marks

Calculate the taxable capital gain on the assets and investments realised during February 2017, for Don only for the 2017 year of assessment. If the proceeds of a particular asset or investment are not subject to capital gains tax, please indicate your reason for that.

18

(UNISA Test 2 2006 amended)

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PART A Calculation of Allan Breker’s taxable income for the year of assessment ended 28 February 2017 R

Salary (R30 000 x 12)

Paragraph (c) of the gross income definition 360 000 (1)

Exempt income: Section 10(1)(o)(ii) application: Any remuneration will be exempt if: Allan was outside the Republic for a period exceeding 183 days full days (he has been in Armenia for 187 in aggregate) during any period of 12 months and for a continuous period exceeding 60 full days. As Allan came back on a regular basis (every last weekend of the month), therefore no exemption will be granted.

nil

(2)

Purchased annuity

One month Less: Section 10A exemption: Y = A/B x C Capital element = R360 000/(25,38 x R28 800) x R2 400

2 400

(1 182)

(1)

(2)

Income: 361 218

7

PART B Calculation of taxable capital gains for Don for the 2017 tax year

Description Calculation Capital gain/ (loss)

R 1980 MG Sport Personal use asset – exclusion i.t.o. par 53

nil (1)

Ski boat – 13 meters Proceeds R 250 000 (½) Less: Base cost (R 200 000) (½) Capital gain R 50 000 x 50%

25 000 (½)

Paintings Personal-use asset – exclusion i.t.o. par 53

nil (1)

Listed shares Proceeds to be included as gross income (the share portfolio is held for speculative purposes) and would therefore also not be subject to CGT (par 35(3)(a))

nil (2)

Bushveld lodge Proceeds R2 100 000 (½) Less: Base cost (R1 350 000) (½) Costs after 1/10/2001 (R 150 000) (1) Capital gain R 600 000 600 000 Excluded from the joint estate i.t.o. the last will of

Graham’s mother. (½)

115 TAX4861/104

Description Calculation Capital gain/ (loss)

R Krugerrands Proceeds R150 000 (½) Less: Base cost (R100 000) (½) Capital gain R 50 000 x 50%

25 000 (½)

Antique furniture Personal use asset – exclusion i.t.o. par 53

nil (½)

Practice - Small Business Proceeds R1 450 000 (½) Less: Base cost (R 650 000) (½) R 800 000 Less: Exclusion (par 57(3)) (R 800 000) (1) (Limited to R1 800 000) Capital gain nil The requirements for selling small business assets

(practice) were met, and therefore the exclusion of R1 800 000 can be utilised.

(2)

Listed shares (From Dawn)

Proceeds (R600 000 X 60%)

R 360 000

Less: Base cost (R350 000 x 60%)

(R 210 000)

(1)

Capital gain R 150 000 x 50%

75 000 (1)

Persian carpets and household furniture

Personal use asset – exclusion i.t.o. par 53

nil

Total capital gain 725 000 Less: Annual exclusion (40 000) (½)

685 000 Assessed capital loss brought forward from 2016 (10 500) (½)


Inclusion rate @ 40 % (½) Taxable capital gain for 2017 269 800

18

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QUESTION 9 20 Marks

This question is divided into 3 case studies. Answer each case study separately and ignore any value-added tax implications. All taxpayers are South African residents. CASE 1 5 marks Fast Cars (Pty) Ltd is a very successful local car manufacturer and dealer. Speedy and Sons (Pty) Ltd is another local car manufacturer and dealer that intended to expand its business into the same geographical region covered by Fast Cars (Pty) Ltd. Accordingly, Speedy and Sons (Pty) Ltd made an offer to purchase Fast Cars (Pty) Ltd’s business for a price that Fast Cars (Pty) Ltd could not refuse. In order to eliminate any future competition, Speedy and Sons (Pty) Ltd entered into an agreement with Fast Cars (Pty) Ltd to prevent it from opening a similar business within the region, for a period of four years. Speedy and Sons (Pty) Ltd paid Fast Cars (Pty) Ltd an amount of R2 million for its acceptance of this restraint of trade. CASE 2 5 marks Speedy and Sons (Pty) Ltd (‘Speedy’s’) has also invested in shares on the Johannesburg Stock Exchange (JSE Ltd) for over 15 years. All its shares are held for investment purposes. On 15 February 2017, following a steady decline in value of the shares over a number of years, Speedy’s finally decided to dispose of its shares held in a company called Best Investment Ltd (a non-connected person), for R40 000. The market value of these shares was determined as R50 000 on 1 October 2001. Speedy’s acquired the shares on 10 March 1997 for R45 000. The time-apportionment base cost of these shares, as calculated in terms of paragraph 30(1) of the Eighth Schedule to the Income Tax Act, is R43 810 (assume correct). Speedy’s had no other disposals of capital assets during its 2017 year of assessment (ended 28 February 2017). No assessed capital loss has been brought forward from the 2016 year of assessment. CASE 3 10 marks Mr Speedy (married out of community of property) sold a former residence on 30 November 2016 for R2 million. He acquired the residence as his primary residence on 1 December 2004 for R300 000. From the date of acquisition until 30 November 2011 (7 years), he resided in the house but used 30% of the floor space of the house for business purposes. On 1 December 2011 he and his family moved into a newly acquired residence and the old residence was then let to a tenant until the date of sale on 30 November 2016 (5 years). No improvements were made to the property over the years of ownership. His legal and transfer costs associated with the acquisition of this former property amounted to R20 000.

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REQUIRED:

CASE 1 Marks

Discuss whether the amount of R2 million will constitute gross income in the hands of Fast Cars (Pty) Ltd. Refer to relevant legislation in your answer.

5

CASE 2 Marks

Calculate Speedy and Sons (Pty) Ltd’s taxable capital gain (or assessed capital loss) arising from the disposal of the shares in Best Investment Ltd, to be included in its taxable income for its 2017 year of assessment. Give brief reasons for your answer, with reference to the Eighth Schedule.

5

CASE 3 Marks

Calculate the taxable capital gain (or assessed capital loss) for Mr Speedy that should be in-cluded in his taxable income resulting from the disposal of his old residence for the 2017 year of assessment. Show all your calculations.

10

118 TAX4861/104


Case 1 The receipt of R2 million is capital in nature as it is received by Fast Cars (Pty) Ltd for the sur-render (sterilisation) of its capital asset, i.e. the right to trade freely. It will therefore not form part of gross income under the general definition.

(1) (1)

Therefore, one has to consider the provisions of paragraph (cA) of the gross income definition. A restraint of trade receipt or accrual may be specifically included in gross income under paragraph (cA), regardless of whether it is of a capital nature or not. However, para-graph (cA) does not apply to companies that are not personal service providers.

(1)

(1)

Since Fast Cars (Pty) Ltd is a company that is not a personal service provider (it is a car manufacturer and dealer), the R2 million receipt will not form part of Fast Cars (Pty) Ltd’s gross income.

(1)

5

Case 2 Calculation of taxable capital gain/assessed capital loss:

Since the proceeds do not exceed the base cost expenditure (incurred before, on and after valuation date) of the shares, the provisions of paragraph 27 of the Eighth Schedule (loss-limi-tation rule 3) will be applicable. Paragraph 27(3)(b) applies (as the market value has been de-termined and the market value exceeds the pre-valuation date expenditure – therefore par 27(3)(a) cannot apply) and the valuation date value of the shares is thus the lower of:

market value (i.e. R50 000); or

time-apportionment base cost (“TAB”) (i.e. R43 810).

Thus, valuation date value = TAB of R43 810.

(1)

(1)(

TABC calculation (not required, amount will be provided): Y = B + [(P – B) x N] T + N = R45 000 + [R(40 000 – 45 000) x 5 ] ( 5 + 16)

= R43 810

Capital gain/loss: R Proceeds 40 000 (1) Less: Base cost (valuation date value + expenditure incurred on/after valuation date)

(43 810) (1)

Capital loss (aggregate capital loss) (3 810)

The capital loss cannot be offset against Speedy and Sons (Pty) Ltd’s normal taxable income for the year and has to be carried forward to the following year of assessment.

(1)

5

119 TAX4861/104

Case 3 Capital gain on disposal of post-valuation date residence: Note: The R2 million proceeds rule does not apply here (i.e. par 45(1)(b) cannot be applied), as Mr Speedy did not reside in the house for the full period of ownership and furthermore, he used the residence for trade purposes (initially only partly and later on, the entire residence) (stated otherwise – R2 million exclusion does not apply where apportionment in terms of par 47 or 49 applies). R Proceeds 2 000 000 (1) Less: Base cost (R300 000 + R20 000) (par 20) (320 000) (2)

Capital gain 1 680 000 Calculation of portion of capital gain that qualifies for R2 million primary residence exclusion (par 45(1)(a)):

Less: Period not occupied as primary residence (R1 680 000 x 5/12) (par 47) (700 000) (2)

980 000 Less: Part used for trade purposes (R980 000 x 30%) (par 49) (294 000) (1)

Capital gain qualifying for primary residence exclusion 686 000

Primary residence exclusion of R2 million thus limited to R686 000. Capital gain on residence not relating to use as a primary residence:

Period not occupied as primary residence 700 000 (1) Part used for trade purposes 294 000 (1)

994 000

Total capital gain on disposal of residence 994 000 Less: annual exclusion (par 5) (40 000) (1)

954 000 40% inclusion rate (par 10) x 40% (1)

Taxable capital gain 381 600

10

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QUESTION 10 16 Marks

The following question consists of case studies relating to expenditure incurred by the taxpayer.

YOU ARE REQUIRED TO: In respect of each scenario to state, with reasons, whether or not the expenditure in question is deductible:

1. R200 000, being the best estimate at year end of the likely damages to be paid by McBurgers Ltd to one of its customers who purchased a cup of coffee which was too hot and, as a result of which, the customer suffered damage to his mouth. McBurgers Ltd has agreed to a settlement, but is taking advice as to the amount thereof.

2. R100 000, being a ‘provision for returnable containers’ included in the balance sheet of Billy’s Biscuits Ltd in respect of the likely amount which the company would have to refund to customers who return their biscuit tins in the following year.

3. R1 000 000, being damages to be paid by Happy Homes Ltd, a firm of building contractors, who failed to install a lightning conductor in a home built by them. Lightning struck the home and killed a resident.

4. R2 000, being the cost of a replacement suit that Tip-Top Drycleaners had to give to a customer when they lost the suit that he had given them to dry-clean.

5. Travel expenses for the year of R4 000 incurred by Fred Sharpe, an attorney, in respect of travel between his home and practice. He conducts his professional activities partly at home and partly at his practice.

121 TAX4861/104


5 Case Studies

1. In order for the expense to be deductible in terms of the general deduction formula (section 11(a) read with section 23(g)), all the requirements of section 11(a) and section 23(g) must be met, i.e. the expenses must have been actually incurred, in the production of McBurgers Ltd’s income, incurred in the carrying on of its trade, and the expenses must not be of a capital nature.

(1)

The question to be answered in this case is whether the expense is deductible as a loss incurred by McBurgers Ltd “in the production of (its) income”. One needs to examine whether the risk of the mishap occurring is an inevitable concomitant of the taxpayer’s trade. (Bonus mark: PE Electric Tramway Company Ltd or Joffe). It is submitted that the risk of making coffee which may be too hot would be an inevitable concomitant of the taxpayer’s trade as an outlet selling coffee. As to the quantum of the expense which has been incurred, it was accepted in Edgars Stores Ltd v CIR (bonus mark) that where the existence of the liability is certain but the amount cannot be accurately determined at the tax year-end, that the liability is nevertheless regarded as having been incurred in the tax year in question.

(1) (1) (1) (1) (1) (1)

In such a case, the best estimate of the liability must be made and would be deductible.

Hence it is submitted that R200 000 would be deductible on the facts as given above. (1)

Note that s 24M (covered in TL106) of the Income Tax Act, which deems an expense not to

be incurred in a tax year if the consideration cannot be quantified, only applies in the case of the acquisition of an asset. Section 24M does not apply in the case of expenditure such as damages.

8

Max 6

2. The facts in this case are different from those in (1) above in that in this case, the company

has not actually incurred a liability at year-end. The liability is only incurred when the tins are returned (Pyott). Hence there would be no deduction. Section 23(e) of the Income Tax Act would in any event preclude such a deduction. (Section 23(e) prohibits the deduction of income carried to a reserve fund.)

(1) (2)

3

3. It would seem unlikely that the risk of an oversight of this importance occurring would be an inevitable concomitant of the taxpayer’s trade, and hence that the damages claim should not be deductible. It is submitted that it would still not be deductible, if it was in an area where installing lightning conductors was not the norm, as the event is too remote from the trade. (PE Electric Tramway Company Ltd or Joffe) (bonus mark)

(1) (1) (1)

3

Max 2

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4. In contrast with the case in (3) above, it would seem that the risk of clothing getting lost in a dry-cleaning business would be an inevitable concomitant of the taxpayer’s trade, and hence that the cost of the suit should be deductible. (PE Electric Tramway or Joffe) (bonus mark)

(1) (1) (1)

3

Max 2

5. If a business requires a person to move from point to point, his travelling expenses may be deducted. However, it must be clear that it is the exigencies of the business that compel him to move from point to point and not other factors. Hence, in the given situation the tax-payer’s motives for conducting his practice from home would need to be examined.

(1)

(1)

In terms of SARS’ practice, expenditure incurred in travelling between home and one’s place of work is treated as private expenditure and is not allowed as a deduction (Section 23(b)).

(1)

3

Total 16

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Jaco Viljoen Manufacturing (Pty) Ltd’ (JV) is the lessee of a building in Paarl, from which it conducts its trade of manufacture of irrigation equipment. JV entered into the lease agreement for its existing building in March 2014. The lease was for a five year period, ending on 28 February 2019. Monthly lease rentals were fixed at R100 000 (excluding VAT) over the term of the lease.

The lessor of the building, ‘Martinus Marais Properties (Pty) Ltd’ (MM), has a portfolio of rental properties from which it derives rental income. During May 2016, the directors of MM approached the directors of JV with a view to relocating JV in another building owned by MM, in order for another tenant of MM to move into the building presently rented by JV. The building that MM would move JV to would be just as suitable for JV’s trade as the present building used by JV. JV is unlikely to lose any customers by moving to the new location.

The directors of MM offered JV cancellation of their existing lease with effect from 1 July 2016 and the right to enter into a new lease over the building that JV would move to, on very favourable terms, including the payment of an amount of R500 000 (excluding VAT) for the surrender of JV’s rights in terms of the existing lease. JV accepted MM’s offer. YOU ARE REQUIRED TO: 1. Discuss whether, and to what extent, the R500 000 receipt for the surrender of JV’s rights in the

existing lease would be taxable in the hands of JV. (9 marks)

2. Discuss whether, and to what extent, the R500 000 payment for the surrender of JV’s rights in the existing lease would be deductible in the hands of MM. (8 marks)

(Ignore CGT.)

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Jaco Viljoen Manufacturing (Pty) Ltd (“JV”)

1. For the R500 000 receipt to be taxable in JV’s hands, all the elements of the gross income definition in section 1 must be present, i.e. the total amount, in cash or otherwise, must have been received by or accrued to or in favour of JV during the year of assessment and it must not be of a capital nature.

(1)

The issue here is whether the receipt represents an amount of a capital or revenue

nature. (1)

With compensation receipts the correct approach is to enquire whether the amount

received is paid as compensation for the loss of a capital asset or to fill a hole in the profits.

Aternatives: Was the contract that was cancelled a product of the taxpayer’s income-earning activities (thus, revenue) or the means by which it earned income (thus, capital) – WJ Fourie Beleggings CC (bonus mark for case name). Has a substantial part of the income-producing structure of the taxpayer been sterilised by the cancellation of the contract or was the payment made for the loss of profits? – Stellenbosch Farmers’ Winery Ltd.

(2) (1)

If the reason for the payment by MM was to compensate JV for anticipated loss of profits

in that the building they would move to was expected to result in a loss of revenue, then the amount would be a revenue receipt in JV’s hands.

(1)

However, on the facts this is not the case as the building that JV will move to will be

equally as suitable to JV’s trade as the building presently occupied by them. Also, JV is unlikely to lose customers as a result of the move.

(1)

It would seem on the facts that the compensation is paid to compensate for the loss of the

right to use JV’s present building, including the inconvenience caused.

It must therefore be considered a capital receipt, being compensation for the loss of use

of a building. (2)

Accordingly, the R500 000 receipt will not be taxable in the hands of JV. (1)

10

Max 8

125 TAX4861/104

Martinus Marais Properties (Pty) Ltd (“MM”)

2. The R500 000 payment would be deductible in the hands of MM if all the requirements of the general deduction formula (section 11(a) read with section 23(g) of the Income Tax Act) have been met.

(1)

It is fairly clear that the expenses are incurred in the production of income and are laid out for the purposes of trade, in that by accommodating its tenants in a way that best suits their needs, MM could expect to continue to earn income.

(1)

The main issue therefore is whether the payment represents an amount of a capital or

revenue nature. (1)

The correct approach is to enquire whether the payment is more closely aligned to the

income-earning structure or the income-earning operations (New State Areas) (bonus mark).

(1) (1)

It would seem that the payment is more closely aligned to the income-earning operations

and that no asset of MM has been added to or improved. It would also seem that no enduring benefit has been created for MM. Therefore, the amount should be deductible.

(1) (2)

8

Max 7

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Lawn Ltd’ (Lawn) is a local manufacturer of lawnmowers. Lawn is renowned for developing good quality Lawnmowers that can be adjusted to suit various grass types and terrains. The company has a 31 March year end.

Lawn had a bumper year due to an increased interest in gardening maintenance in South Africa and made sales of R336 000 during the year. Purchases of materials and parts to manufacture its lawnmowers totalled R147 000.

On 1 January 2017, a fatal accident occurred and one of Lawn’s key employees, Mrs Gardener, was killed by a drunk driver whilst returning home from her New Year’s party. Lawn paid the family of Mrs Gardener the amount of R150 000 as a goodwill gesture.

During March 2017, Lawn paid for expenses (R84 000) that were in connection with a cleaning service. Clean Ltd will clean Lawn’s factory and machines in September 2017. Assume that the R184 000 was ‘actually incurred’ in Lawn’s year of assessment ended 31 March 2017.

During the year, Lawn incurred penalties on its late VAT payments to the amount of R19 000.

During January 2017, a fire in the factory destroyed lawnmowers which had a cost of R8 000. By the end of the year, R6 000 had been received from insurance pay-outs. No other amounts are expected to be paid out.

During the current year, Lawn sued a competitor for an amount of R460 000, as Lawn felt that the competitor had copied various unique lawnmower designs of Lawn’s. Lawn won the case in January 2017, but received only R412 000, as the judge felt that this was fair compensation. R180 000 of the receipt was due to lost sales and the remainder for bad publicity brought upon Lawn because the competitor denied the allegations. YOU ARE REQUIRED TO:

1. Calculate the taxable income of Lawn Ltd for the year ended 31 March 2017. Mention any applicable case law. Ignore VAT and give full reasons for the inclusion or exclusion of each item given.

(10 marks)

2. State whether the two statements below are true or false. Give full supporting reasons for your answers, including any relevant Income Tax Act references. These statements are independent of (1) above.

i. If a taxpayer sometimes uses her lounge as an office to prepare work for her salaried income, she will be able to claim a deduction of expenses incurred relating to the lounge. (3 marks)

ii. The New State Areas case was concerned with the issue of whether an amount of income was capital in nature. (1 marks)

127 TAX4861/104


Lawn Limited

PART 1

R

Sales Section 1, definition of gross income 336 000 (1)

Purchases Section 11(a) (147 000) (1) Goodwill compensation

It can be argued that this was paid to keep the remainder of Lawn's staff happy and contented (Provider case – bonus mark), thus payment is in the production of income OR not in the production of income as not an inevitable concomitant of taxpayer’s trade / risk of happening separable from the trade (cases: PE Tramways, Joffe – bonus mark) and then not deductible. (150 000) (2)

Prepaid expenses

Section 11(a). Section 23H does not apply as service is to be received in first 6 months of next year of assessment of Lawn Ltd. (84 000) (2)

VAT penalties No deduction, Section 23(d) prohibition OR not in the production of income - (1)

Cost of lawnmowers Section 23(c) prohibition (R8 000 - R6 000) (2 000) (2)

destroyed

Compensation receipt

Lost sales, revenue nature (WJ Fourie Beleggings CC / Stellenbosch Farmers’ Winery Ltd – bonus mark) 180 000 (2)

Portion relating to bad publicity, capital nature - (1)

Taxable income

133 000

12

Max 10

PART 2 i) FALSE Section 23(b). The area of the domestic premises has to be used exclusively and regularly for business and specifically equipped for purposes of the taxpayer’s trade. Also, her duties have to be performed mainly at home or, if she is an agent or representative earning mainly commission, mainly otherwise than in an office provided by her employer (i.e. no deduction from income).

(3)

ii) FALSE The case concerned the general deduction definition, (not gross income), regarding whether payment was of a capital nature.

(1)

4

Total

14

128 TAX4861/104


PART C (Extract from Test 1, 2014) Mr Bob Builder is a 29 year old, unmarried, engineer and building expert who was born, bred and lives in South Africa (SA). He is passionate about buildings and developed innovative design to build low-cost housing that would withstand tornados and floods. He registered a patent for his building design at a cost of R50 000 (no deduction was claimed in this regard) in February 2015 in South Africa. The following transactions occur during the 2017 year of assessment: 1. Royalties for the use of his patent • CosmoCity pays R115 000 on 15 May 2016 for the right to use his patent for 2 years. The

Concrete Guys pays R57 000 on 1 January 2017 for the right to use his patent for 1 year. Both CosmoCity and The Concrete Guys are South African registered companies.

• Create USA, a construction company registered in the United States of America (USA), pays R185 000 (Rand equivalent) on 1 June 2016 for the right to use his patent for 3 years.

2. SA Interest • Interest accrues from Beep Bank, a South African financial institution, on 1 July 2016 and

1 January 2017 amounting to R15 000 and R16 000 respectively. 3. Primary residence: plot and house (Bob Builder does not carry on farming activities) • On 1 June 2006, Mr Builder purchased a small plot of land in Cullinan for R1 200 000. The

plot consists of a small farmhouse on 2.5 hectares of land. He sells the Cullinan plot on 1 December 2016 to Ms Huis, a South African resident, for R3 800 000. The plot has not been used for the purposes of a trade.

PART C 20 Marks

REQUIRED Marks

(1) Calculate the tax implications for Mr Builder for the 2017 year of assessment. (Ignore any VAT implications)

10

(2) Assuming Mr Builder is a non-resident. Calculate the withholding tax for transac-tions 1 to 3 for the 2017 year of assessment. Provide reasons for each transaction for inclusions or exclusions. Also assume that because Mr Builder is a non-resi-dent, the plot and house in transaction 3 cannot be his primary residence, but treat it as a long-term investment.

5

(3) Discuss, with reference to relevant tax legislation and case law, the tax and with-holding tax implications of transaction 1 for the 2017 year of assessment. Assume the following:

Mr Builder is a non – resident

The patent is registered in the USA and not South Africa (Ignore any VAT implications)

5

Round all amounts off to the nearest Rand.


129 TAX4861/104


PART C

R

QUERY 1 - Calculate tax implications

Taxable income

R

Tx 1: Royalties on patent (resident taxed on world wide income) 357 000

CosmoCity

115 000 (½)

The Concrete Guys

57 000 (½)

Create USA 185 000 (1)

Tx 2: SA Interest (R15 000 + R16 000)

31 000

(1)

Exemption ito S10(1)(i)

(23 800) 7 200 (1)

Tx 3: Sale of primary residence

Proceeds

3 800 000

Less: Base cost

(1 200 000)

Capital gain

2 600 000

(1)

Capital gain attributable to 2 ha (Par 46)

2 080 000

(1)

2ha / 2.5ha x 2 600 000

Less: Primary residence exclusion (limited to R2 million) (2 000 000)

(1)

80 000

Aggregate capital gain:

Capital gain after primary residence exclusion 80 000

Portion of primary residence in excess of 2 ha R520 000 (R2.6m x 0.5ha/2.5ha) OR (R2,6m - R2.08m = R520 000) 520 000

(1)

600 000

Less: Annual exclusion

(40 000)

(1)

560 000

Taxable capital gain - inclusion rate of 40%

224 000 (1)

TOTAL TAXABLE INCOME

588 200

Total 10

ORDER NB!

130 TAX4861/104

QUERY 2 - Withholdings tax implications

R

Tx 1: Royalties on patent

CosmoCity - SA Source (R115 000 x 15%) 17 250 (1)

The Concrete Guys - SA source (R57 000 x 15%) 8 550 (1)

Create USA - not SA source therefore not subject to WHT - (1)

Tx 2: SA Interest - source in SA

Interest received 1 July 2016 (R15 000) and 1 January 2017 (R16 000) is subject to withholding tax at 15% ito s50A however it is also exempt from WHT ito s50D(1) because it is interest received from a bank. nil

(1)

(1)

Tx 3: Sale of immovable property

SA source subject to WHT ito S35A at 5% on proceeds (seller is an individual).

R3 800 000 x 5%

190 000 (1)

Note: S35A is not a final tax but an amount withheld (pre-paid tax) by the purchaser of the property

TOTAL WITHHOLDING TAX PAYABLE

212 350

Total 6

Max 5

QUERY 3 – Discussion Tx 1: Royalties received

Before an amount can form part of gross income, all the elements of the gross income definition must be met. The following requirements of the gross income definition are obviously met by the scenario: total amount, in cash or otherwise, received by or accrued to and not of a capital nature. (1)

As Bob Builder is a non-resident, he will only be taxed on amounts received or accrued from a source within the Republic in terms of section 9 (Lever Brothers and Unilever Ltd not applicable because the patent is registered in the USA). (1)

Source of the income in terms of s 9(2)(c) and (d):

- Royalties paid by CosmoCity (SA resident) - SA source and will thus be included in gross income of Mr Builder.

(1)

- Royalties paid by The Concrete Guys (SA resident) - SA source and will thus be included in gross income Mr Builder.

- Royalties paid by Create USA (non-resident) on a patent registered in the USA are not deemed to be from a source in SA in terms of s9(2)(c) or (d). These royalties are deemed by s9(4)(c) to be from a source outside SA (in the USA as per information in the required).

(1)

Royalties received by a non-resident from a source in the Republic are subject to a final withholdings tax of 15% for royalties ito s49B(1).

(1)

However if s49B(1) is applicable, the royalty will be exempt in terms of section 10(1)(l). (1)

Total 6

Max 5

131 TAX4861/104


Marcel Carvalho is a 28-year-old divorcee who inherited assets and investments from his deceased father’s estate on 20 November 2013. All amounts exclude VAT, except if stated otherwise. As Marcel is an Italian passport holder, while also being a resident of the Republic, he decided to leave South Africa on a permanent basis and to live and work in Italy. On 10 May 2016, he left the Republic, intending never to live here again and only to visit family every now and again. He did visit the Republic on two occasions after emigrating. The first visit was during August 2016 for 20 days and his second visit was in January 2017 also for 20 days. He was therefore physically present in the Republic for 111 days and absent from the Republic for 254 days during the year of assessment ended 28 February 2017. His assets and investments as well as the transactions relating to them, income accrued and expen-ses incurred are as follows: 1. Residential property

Marcel inherited a residential property from his father’s estate on 20 November 2013. The cost price in 2003 for his father amounted to R1 260 000 which included all costs. During 2006 improvements of R320 000 were effected to the property by his father. The market value of the property amounted to R2 200 000 on 20 November 2013. Marcel effected further improvements to this property during November 2013 and December 2013 to the value of R180 000 and com-menced using the property as his primary residence on 5 January 2014. He resided at the property from 5 January 2014 until 30 April 2016. From 1 to 10 May 2016 he stayed with his brother until his departure from the Republic on 10 May 2016. The market value of the residence on 9 May 2016 was R4 400 000. During his residence at the property, he used 10% of the floor space of the house as an office. This office was equipped for purposes of his trade and used as such until 30 April 2016. The total property was let to a tenant on a monthly basis from 1 May 2016. On 1 May 2016, while the property was subject to the rental agreement, it was also put up for sale in the property market. The tenant consequently gave notice and moved out on 31 July 2016. Marcel decided not to re-let the residence again, hoping that it would rather be sold. The house was subsequently sold on 31 August 2016 for R4 500 000. The agent’s commission paid by Marcel and which was not included in the selling price amounted to R260 000. A refundable deposit of R20 000, which is equal to one month’s rent, was received from the tenant on 1 May 2016. The tenant only paid rent for May and June 2016. On 31 July 2016, he forfeited his refundable deposit, as he did not pay rent for July 2016. City Council rates and taxes, which were paid by Marcel, amounted to R2 100 per month throughout the current year of assessment. The tenant defaulted on the payment of his water and electricity account at the city council for July 2016 and Marcel consequently had to pay the outstanding account of R7 200 on 10 September 2016 in order for the registration of the sale to be effected. Repairs amounting to R23 000 were effected by Marcel to the residence during August 2016. You may use the following periods for any allocations, which you may deem necessary: Total period of owning the residence 20 November 2013 – 31 August 2016 34 months Period of residing in the residence 5 January 2014 – 30 April 2016 28 months

132 TAX4861/104

2. Investment / trading property

Marcel inherited an undeveloped property (vacant stand) from his father’s estate on 20 November 2013 which had a market value of R2 200 000 on that date. The cost price for his father was R1 000 000 in October 2003. At first, Marcel was undecided on what to do with the property and eventually just held on to it as a capital investment. On 3 March 2016, when the property had a market value of R2 900 000, he commenced the subdivision of the property into 10 industrial stands of 500m2 each (therefore he commenced trading with that property from that date). The cost of the subdivision was R1 200 000 and advertising expenses were R65 000. He commenced selling the stands on 15 April 2016. All 10 stands were sold for R550 000 each by 1 May 2016.

3. Portfolio of local shares Marcel inherited this share portfolio from his father’s estate on 20 November 2013. All the shares in the portfolio were purchased by Marcel’s father more than three years before his death on 5 October 2012. The total cost of the shares acquired over the years by him amounted to R1 230 000. On 20 November 2013 the market value of the shares was R2 150 000 and on 9 May 2016 the market value amounted to R2 655 000. Marcel did not trade in this share portfolio. During his visit to the Republic in January 2017 he sold all the shares in the portfolio for R2 350 000. He paid securities transfer tax of R5 875 and broker's commission of R2 350 on this transaction.

4. Portfolio of foreign shares – refer to TL105 and TL106 Marcel commenced trading in foreign shares during 2014. He entered into the following transac-tions for the year of assessment ended 28 February 2017:

Share code

Date purchased

Cost price

Date sold

Selling price

Market value on

9 May 2016

R R R

FRESIN 12/03/2014 68 000 17/04/2016 89 000 -

CODEL 08/04/2014 110 000 10/06/2016 163 000 158 000

SHONDE 22/08/2016 95 000 06/01/2017 155 000 -

These shares are traded on stock exchanges in the foreign countries and Marcel does not own more than 10% in any foreign company.

5. Cash investment

Marcel invested R3 748 000 in a local money market fund. This investment earned R30 750 in-terest for the period 1 March 2016 until 9 May 2016. He transferred the funds in this investment to Italy on 10 May 2016 and invested it there at an Italian Bank earning R72 000 (Rand equivalent) interest for the period 10 May 2016 until 28 February 2017.

133 TAX4861/104

6. Other capital (prsonal-use) asset transactions

Note Asset Date

purchased / inherited

Cost price/ market

value when inherited or

obtained R

Date sold

Selling price

R

Market value at

9 May 2016

R

6.1 Yacht 20/11/2013 830 000 14/04/2016 810 000 -

6.2 Gold coin collection 20/11/2013 985 000 10/01/2017 992 000 970 000

6.3 Bugatti Roadster 10/09/2014 920 000 20/04/2016 1 100 000

6.1 The yacht was purchased by his father during 2003 for R530 000 and bequeathed to Marcel

in his valid will. The yacht is used by Marcel for recreational purposes, e.g. sailing during week-ends. The yacht is 12 metres long.

6.2 The gold coin collection was purchased over the years by Marcel’s father. The total cost

price for his father amounted to R962 000. As Marcel did not really know what to do with these coins, he left them in a safe deposit box at a local bank but then subsequently sold them to a gold coin company when he visited the Republic during January 2017.

6.3 The Bugatti Roadster was used by Marcel for personal travel. It was sold to an investment

car dealer.

REQUIRED: Marks

(a) Calculate Marcel Carvalho’s taxable income for the year of assessment ended 28 February 2017. Provide short reasons for amounts, which you regard as not taxable and not deductible. Show all calculations. Assume that Marcel did not conduct any activities in a permanent establishment in the Republic after his emigration.

40

(b) Discuss with reasons and references to the VAT Act whether Marcel Carvalho should register for VAT regarding the transaction in paragraph 2 of this question, assuming the transaction is a supply of goods in the course or furtherance of an enterprise. Also calculate the amount of output tax which he would be liable for on the transaction (assuming he should have registered for VAT and the selling price of R550 000 per stand includes VAT).

5

Unisa Exam 2013 (amended)

PLEASE NOTE

Item 4: Foreign shares and share-dealers will also be discussed in TL105 and 106. We have left it in the integrated exam question to demonstrate the level of integration expected from you in the year-end exam (assessment).

134 TAX4861/104


(a)

Taxable income of Marcel Carvalho for the year of assessment ended 28 February 2017

R R R Capital

gains Taxable income

1. Residential property Not deemed disposal on date of emigration nil (1) Proceeds 31/8/2016 4 500 000 (1) Less: Base cost (2 640 000)

Inherited on 20/11/2012 (par 40(2)(a)) 2 200 000 (1) Improvements (2012) (par 20(1)(e)) 180 000 (1) Agent’s commission (par 20(1)(c)(i)) 260 000 (1) Rates and taxes (denied ito par 20(2)(b)) - (1) Repairs (denied ito par 20(2)(b)) - (1)

Capital gain 1 860 000 Less: Period interrupted residence (par 47)

(R1 860 000 x 6/34 months)

(328 235)

328 235

(1)

1 531 765 Less: Portion used as study (10%) (par 49)

(R1 531 765 x 10%)

(153 176)

153 176

(1)

1 378 589 Less: Primary residence exclusion (par 45(1)(a)) (1 378 589) (1)

-

Rent received (R20 000 x 2m) (May – June 2016) 40 000 (1) Deposit forfeited – rent received for July 2016 20 000 (1) Rates and taxes (R2 100 x 3m) (May – July 2016) (6 300) (1) Water and electricity (July 2016) (7 200) (1) Repair in August – no trade after 31/7/15 (no s 11(a)) - (1) 2. Investment / trading property Proceeds – deemed disposal (par 12(2)(c)) 2 900 000 (1) Less: Base cost par 40 (2 200 000) (1)

Capital gain 700 000 700 000

Sale of trading stock (R550 000 x 10) 5 500 000 (1) Cost of sales (2 900 000) (1) Cost of sales (1 200 000) (1) Advertising costs (65 000) (1) 3. Portfolio of local shares Proceeds – deemed disposal on 9 May 2016

s 9H(2)

2 655 000

(1) Less: Base cost par 40 (2 150 000)

Cost price on 20/11/2012 2 150 000 (1) Securities transfer tax (STT) and Broker’s

commission – no cost incurred on deemed disposal

nil

(1)

Capital gain 505 000 505 000

Sale of share –non-resident selling movable assets nil (1)

135 TAX4861/104

R R R Capital

gains Taxable income

4. Portfolio of foreign shares (Refer to TL105 and 106)

FRESIN [net amount R21 000] Sale of trading stock (17/4/2016) 89 000 (1) Less: Cost of sales (68 000) (1)

CODEL (9/5/2016) [net amount R48 000]

Deemed sale of trading stock 158 000 (1) Less: Cost of sales (110 000) (1) Sale of shares after May 2016, not a resident nor

from a deemed source.

nil (1)

SHONDE (after May 2016) Not a resident nor from a deemed source. nil (1) 5. Cash investment Deemed disposal on 9/5/2016, but proceeds

(R3 748 000) = base cost (R3 748 000)

nil

(1) Local interest received 30 750 (1) Less: Interest exemption (s 10(1)(i)) (23 800) (1) Foreign interest received Not a resident nor from a deemed source. nil (1) 6. Other capital assets 6.1 Yacht Proceeds on 14/04/2016 810 000 (1) Less: Base cost (830 000) (1)


Not a personal-use asset as it is >10 metres – par 53. Capital gain will not be disregarded. Par 15 is applicable and therefore the loss will be disregarded.

nil

(1) 6.2 Gold coin collection Proceeds on 09/05/2016 (deemed disposal) – s 9H 970 000 (1) Less: Base cost (985 000) (1)


Excluded from personal-use asset – par 53. Loss is not excluded into par 15.

(15 000)

(1)

Sale of coins – not taxable non-resident selling movable assets

nil (1)

6.3 Bugatti Roadster Proceeds on 20/04/2016 1 100 000 Less: Base cost (920 000)

Capital gain 180 000 Excluded as Roadster is a personal-use asset –

par 53.

nil

(2)

136 TAX4861/104

R R Capital

gains

Taxable income

Total capital gains 1 671 411 Less: Annual exclusion (40 000) (1)

Net capital gain 1 631 411

Taxable capital gain (after annual exclusion @ 40%) 652 564 (1)

Taxable income 2 004 039

[max 40]

(b) Registration for VAT Section 23(1) of the VAT Act (1) A person is required to register as a vendor: (1) - At the end of the month during which the total value of the taxable supplies for the

preceding 12 months exceeded R1 million; or

- At the beginning of any month where, in terms of a contractual obligation in writing, the total value of the taxable supplies to be made by that person in the coming 12 month period will exceed R1 000 000.

Marcel has an obligation to register in terms of section 23(1)(b) once the sale agreements

of two stands are duly signed and entered into; or in terms of section 23(1)(a) at the end of the month when two stands were sold.

(1) (1)

Output VAT: R550 000 x 14/114 x 10 = R675 439. (1)

[5]

137 TAX4861/104


This question consists of two related parts, A and B.

PART A 32 marks

James is a successful sugar cane farmer in KwaZulu-Natal. He purchased his land in 1943 for R5 000 and has been farming on the land ever since. During 1980, James erected a sugar mill on a corner of the farm. This proved to be very successful and in 1985, James decided to focus on the management of the mill. He therefore handed the management of the farm over to his son, Jacques. Jacques has always loved farming and has been successful in growing the profitability of the farm. In his 2002 year of assessment, Jacques got married (out of community of property) and he and his wife moved into another residence on the farm (there are two houses on the farm). James donated half of his farm (only land, not the part of the farm on which the mill and the two residences are situated) to his son. As required in terms of the Subdivision of Agricultural Land Act, he obtained the necessary consent from the Minister of Agriculture to subdivide the land into two pieces. The market value of this portion of the land (i.e. the portion donated) was R5 million on the date of the donation. During the last couple of years, Jacques received several offers to buy part of his land, i.e. the portion located adjacent to the national highway. Various developers wanted to buy the land and to develop new properties on it. Jacques did not want to sell the property but wanted to keep on farming. During February 2016, however, Jacques received an offer for part of the land that he could not refuse. On 10 March 2016, Jacques sold a small piece (10%) of his land to a local, commercial property developer, Go Big (Pty) Ltd (they are not connected persons). Jacques received R3 million for the piece of land that he sold. The open market value of this piece of the land at the time of sale was R2.5 million. Jacques was not involved in the development on the land but attended various meetings on the process of developing, as it impacted on the operations of the farm. Jacques is not registered as a vendor for VAT purposes and transfer duty of R157 000 was paid by the purchaser on the sale of the land. Go Big (Pty) Ltd is a category C VAT vendor (monthly tax periods). The company paid R1 million of the purchase price to Jacques on 10 March 2016 and the balance of R2 million was paid to Jacques on the date of registration of the land into Go Big (Pty) Ltd’s name, i.e. 12 April 2016. Go Big (Pty) Ltd purchased the land for the purposes of making both taxable and exempt supplies. The company erected a large building on the land. The building consists of a shopping centre on the ground floor and residential flats on the first floor. The floor space occupied by the retail shops and the flats respectively amounts to 50% each of the total floor space of the building. Go Big (Pty) Ltd obtained approval from SARS to use the floor space method (50:50) as its method of apportionment. PART B 8 marks David is James’ 54-year-old brother who has been residing in Sydney, Australia, for the past ten years. Since emigrating to Australia ten years ago, David only returns to South Africa once a year to visit his family, but he never stays longer than three weeks. Although David is a non-resident and he does not carry on business in South Africa, he derives some investment income from South Africa. David earned the following investment income during his 2017 year of assessment:

R

Interest on a loan to his brother, James 4 200

Interest on fixed deposit from a bank in the Republic 15 000

138 TAX4861/104

PART A 32 Marks

REQUIRED Marks

1.

Discuss if the R3 million received by Jacques for the piece of land that he sold during his 2017 year of assessment will be included in his gross income for that year of assessment. Refer to relevant case law. Communication skills, outlay and logical argument

10 2

2.

Calculate the donations tax that James was liable for in respect of the land that he donated to his son, Jacques, during his 2002 year of assessment, by taking the fol-lowing into account:

The base cost of the land donated is the valuation date value (i.e. valuation value as on 1 October 2001) of R4.5 million.

James made no other donations during his 2002 year of assessment.

Apply current donations tax legislation to your calculation.

3

3.

Take the following assumptions into account and calculate the capital gains tax, ari-sing from the sale of the land to Go Big (Pty) Ltd, that should be included in the tax-able income of Jacques, (remember only 10% of Jacques’ land that he originally ac-quired via donation from his father was sold):

Assume the proceeds received by Jacques for the sale of the land are capital in nature.

Assume that the donations tax liability (calculated under (2) above) was not paid by James, but by Jacques as the donee.

Ignore any sub-division costs incurred in respect of the land (no information was given in this regard, as the application thereof is not required in the question).

Support your calculations by referring to relevant legislation. Mark allocation: ● Calculations and workings (8 marks) ● Paragraph numbers (4 marks) ● Maximum: 10 marks

10

4.

Calculate, supported by reasons, the VAT implications for Go Big (Pty) Ltd of buying the land from Jacques. Clearly indicate if the VAT calculated is input tax or output tax. Also, in your answer, show the relevant tax period(s).

7

PART B 8 Marks

REQUIRED Marks

Calculate the effect that the interest receipts will have on David’s South African taxable income for his 2017 year of assessment, if any. Also calculate any withholding tax liability regarding the interest income. Provide reasons for any amount that is exempt from income tax or withholding tax. Ignore any double taxation agreement in place between South Africa and Australia for purposes of your answer.

8

139 TAX4861/104


PART A (1) Gross income inclusion

For an amount to be included in gross income, all of the requirements of the general gross income definition (section 1 of the Income Tax Act) have to be met. “Gross income” is defined, in relation to any year or period of assessment, as the total amount, in cash or otherwise, received by or accrued to or in favour of such resident during such year or period of assessment, excluding receipts or accruals of a capital nature.

(1)

The R3 million constitutes an amount, which was received by Jacques during the 2017 year of assessment.

(1)

The issue for consideration is, however, whether the R3 million constitutes an amount of a revenue or capital nature.

(1)

The golden rule used by courts to establish whether the proceeds on the disposal of an asset are of a capital or revenue nature is the test of intention. (CIR v Stott or Natal Estates Ltd v SIR – bonus mark)

(1) (1)

The taxpayer’s original intention at the time of acquiring the asset must be investigated and then also his intention during the whole holding period – has there been a supervening change in intention? Has he “crossed the Rubicon” (Natal Estates Ltd v SIR), going from a capital to a revenue intention. (Bonus mark for Natal Estates case if mark not already given)

(1) (1) (1)

Did the land sold by Jacques represent the “tree” (capital asset) or the “fruit” (profits– revenue) – (CIR v Visser).

(1) (1)

In determining whether Jacques’ intention was to realise a capital asset or whether he sold the land in pursuance of a profit-making scheme, the totality of the facts must be considered. (Bonus mark for case law, i.e. Natal Estates (only if mark not already given) or Elandsheuwel Farming, or Pick ‘n Pay Employee Share Purchase Trust case, or Nussbaum)

(1) (1)

Two alternatives to above: First alternative: It was held in the Stott case (1) that the mere realisation of a capital asset to best advantage (and the mere sub-division of land) does not constitute a trade (1), unless there is a subsequent change in intention and the taxpayer “crosses the Rubicon” by being involved in a scheme of profit-making. Second alternative: John Bell case (1) – mere change of intention to sell an asset held as capital does not per se render the profit realised from the disposal liable to tax; something more is required (1) in order to change the character of the asset and thus render the proceeds gross income.

140 TAX4861/104

Jacques received the farm from his father as donation more than 10 years ago; he used the farm for bona fide farming activities. The facts indicate that his original intention was the acquisition of a capital asset and there was no change in his intention. He did not advertise the land; he merely sold the land when he received an offer that he could not refuse. There was no active involvement from his side in developing the land. He merely attended meetings in order to ensure that the development would not negatively impact his farming operations and the operations of the mill. Thus, he realised a capital asset (to best advantage).

(1)

(1)

It follows that the proceeds derived from the sale constitute a capital receipt and do thus not form part of Jacques’ gross income for his 2017 year of assessment.

(1)

However, in terms of section 102 of the Tax Administration Act 2011 the burden of proof rests upon the taxpayer to show that an amount is of a capital nature.

(1)

Max 10

Communication skills, outlay and logical argument 2

(2) Calculation of James’ donations tax liability on donation of land to Jacques in 2002: R Market value of the land donated in 2002 5 000 000 (1) Less: Exemption ito s 56(2)(b) (100 000) (1)

Taxable donation 4 900 000

Donations tax @ 20% paid

980 000

(1)

3

(3) Jacques realises a capital gain on the sale of the land and the proceeds are thus subject to capital gains tax (“CGT”). In terms of section 26A, CGT is included in the taxable income of a taxpayer. He will be liable for income tax on the CGT in his 2017 year of assessment. Calculation of capital gains tax: R Proceeds (par 35 of 8th Sch) 3 000 000 (2) Less: Base cost (R500 000 + R9 800) (par 20) [R500 000 (per par 38: market value on date of donation, R5 million x 10% (sold)) + par 22 portion of donations tax. Par 22 donations tax: (M – A)/M x D i.e. [(capital gain of donor (James)/market value of land on donation date) x donations tax paid by donee (Jacques], thus (R5 000 000 – R4 500 000)/R5 000 000 x R980 000 = R98 000. Thus, include @ 10% (as only 10% of land sold), i.e. 10% x R98 000 = R9 800

(509 800) (2) (1) (1)

(3) (1)

2 490 200 Less: Annual exclusion (40 000) (1)

2 450 200

Taxable capital gain (40%) 980 080 (1)

12

Max 10

141 TAX4861/104

(4) R 14/114 x R2.5 million x 50% = (153 509) (3) (14/114 (tax fraction) x lower of consideration paid of R3 million or the open market value of R2.5 million (section 1, definition of “input tax”, par (b)); input tax claim limited to taxable supplies (50%))

(1)

Go Big (Pty) Ltd can claim notional input tax in its April 2016 tax period. Since it is second-hand fixed property acquired from a non-vendor, notional input tax is claimable to the extent that payment has been made (s 16(3)(a)(ii)(aa)), but only if the fixed property has already been registered (s 16(3)(a)(ii)(bb)(A)) in the purchaser’s name (Go Big (Pty) Ltd is registered on the invoice basis). The property was only registered in Go Big (Pty) Ltd’s name on 12 April 2016, but full payment of the purchase price had also been made by registration date.

(2)

(1)

(1)

Accordingly, Go Big (Pty) Ltd can claim the full notional input tax deduction in its April 2016 tax period.

8

Max 7

Part B Calculation of effect of interest receipts on David’s taxable income for his 2017 year of assessment: R Interest from James – gross income (from a source in the Republic ito section 9(2)(b)) (derived from the utilisation or application in the Republic by any person of any funds or credit obtained in terms of any form of interest-bearing arrangement.) Interest from bank – gross income (SA source ito section 9(2)(b)

4 200

15 000

(1)

(1)

Total gross income 19 200 Less: Exempt income - section 10(1)(h) (R4 200 + R15 000) (David is a non-resident who was not physically present in the Republic for more than 183 days, nor did he carry on business in South Africa)

(19 200) (3)

Taxable income nil (1)

Withholding tax liability: Final withholding tax paid on interest received from James in terms of section 50B(1): 15% x R4 200

630

(1) Interest received from SA bank (R15 000) – exempt from withholding tax ito section 50D(1)(a)(i)(bb) (since paid by a bank)

nil (1) (1)

9

Max 8

142 TAX4861/104


PART B (Extract from Test 1, 2016) In June 2015 Mr Paul Nagel passed away and left his wife, Paulina, his entire estate which included a life policy (long-term insurance product to the value of R2 000 000) that paid a net amount of R8 200 000 to her. Paulina’s nephew, Peter (a certified financial planner), advised her to invest the money in several shares listed on the JSE Limited. In December 2015 Paulina decided to retire (at the age of 52) and move to Knysna in the Western Cape province of South Africa. Here she found her ideal house overlooking the bay. The property was partially operated as a guesthouse before the owner (Mrs Abbi Abbot) sold the property. Purchase of the coastal property Abbi (the seller of the property and a registered VAT vendor) bought the property six years ago for R4 million (exclusive of VAT). Since then she operated a highly successful guesthouse (turnover of R3 100 000 per annum) on half of the ground floor of the house, while residing in the remainder of the double-storey house (32% of the property was used for purposes of the guesthouse). Three years ago she made renovations and improvements to the value of R1 million (exclusive of VAT) to the property, of which R250 000 was allowed as a repairs and maintenance deduction in terms of section 11(d) of the Income Tax Act. The remaining costs incurred of R750 000 were incurred in the same ratio as the house:guesthouse floor space ratio. After negotiations by the estate agent, Abbi agreed to accept an offer by Paulina to buy the property for R13,6 million (exclusive of VAT). The seller would then pay the estate agent a commission of 5% of the selling price. Paulina is not registered for VAT. The sale agreement was signed in March 2016 and the property was registered in Paulina’s name on 1 May 2016. Paulina did not want to have a mortgage on her new house but decided that, since the residential rental market was experiencing a boom and the selling market was in such a bad state, she would rather rent her current primary residence (old house) for the next 6 to 8 months and then decide if she wanted to sell it or not. She therefore decided to sell some of her shares in listed companies. She sold the following shares (all listed) on 15 March 2016:

Company name

Date purchase Number of sales

Cost per share

Valuation date value (per

share)

Selling price per share

Richmountain 2 October 1999 7 000 R17 R22 R387

Wooliesfoodie 22 August 2015 15 000 R310 - R350

Total amount received R7 959 000

143 TAX4861/104

The proceeds received from the sale of the shares were, however, not sufficient to cover the full purchase price of her new house and Paulina therefore borrowed money from her non-resident brother, Kyle, who lives in Australia and has last been in South Africa in 2013 when he visited relatives. The loan was made at a market-related interest rate. Kyle received interest of R70 000 in respect of the loan during the 2017 year of assessment. PART B 20 Marks

REQUIRED Marks

(a) Calculate the capital gains tax (CGT) implications for Abbi (the seller) and Paulina (the purchaser) in respect of the sale of the property. Determine any taxable capital gain or loss arising from the transaction. Note:

- Abbi and Paulina had no other disposals for CGT purposes during the 2017 year of assessment.

- Abbi has an assessed capital loss of R3.2 million for the 2016 year of assessment.

8

(b) Calculate the effect of the disposal of the listed shares on Paulina’s taxable income for her 2017 year of assessment assuming SARS assessed that the shares were sold as part of a profit-making scheme (Paulina was assessed as a share dealer). Support your calculation with reasons.

7

(c) Discuss all the tax implications for Kyle of the interest of R70 000 that he received during the 2017 year of assessment. Refer to relevant legislation in your discussion.

5

Total for Part B 20

144 TAX4861/104


(a) (8 marks) Purchaser (Paulina): The property will be a capital asset for the purpose of the Eighth Schedule to the Income Tax Act and as Paulina will be living in the house it will be considered to be her primary residence. The cost of acquiring the asset will be the base cost of the asset in terms of par 20. The base cost will be the actual amount paid (R13.6 million).

(1)

The commission paid will not affect Paulina as it is paid by the seller. Seller (Abbi): The property is a capital asset in Abbi’s hands. The proceeds (or selling price) received by Abbi is R13.6 million.

R

13 600 000

(1)

The base cost of the asset is determined in terms of par 20 of the Eighth Schedule and is the cost of acquiring the asset. The base cost is the purchase price of R4 million plus improvements made after acquisition (R1 000 000 – R250 000), plus the commission paid, as it is part of the process of selling the asset (par 20(1)(c)(i)) (R13 600 000 x 5% = R680 000)

(5 430 000)

(4 000 000)

(750 000)

(680 000)

(½)

(½)

(1)

The capital gain on the disposal is therefore the proceeds of R13.6 million less the base cost of R5 430 000:

8 170 000

The property was partly used as Abbi’s primary residence and the capital gain realised will qualify for the primary residence exclusion. An adjustment must, however, be made to the extent that the property was used for trade purposes (par 49).

Less: Adjustment for trade purposes:

- 32% x R8 170 000

(2 614 400)

(1)

5 555 600 Less: Primary residence exclusion (limited to R2 million) (2 000 000) (1)

Add back (non-residential portion): 32% x R8 170 000 2 614 400 (1)

6 170 000

145 TAX4861/104

There were no other capital gains or losses that arose in the year of disposal and the R40 000 annual exclusion can now be applied. Less: Annual exclusion

R

(40 000)

(½)

Aggregate capital gain 6 130 000 Less: Assessed capital loss brought forward from 2016 (3 200 000) (1)


Taxable capital gain to be included in taxable income @ 40% 1 172 000 (½)

Total marks

Maximum

9 8

(b) (7 marks)

Effect on Paulina’s taxable income: Marks

Gross income: Wooliesfoodie shares (15 000 x R350) 5 250 000 (1)

Less: Opening stock (s 22(2)) - Wooliesfoodie shares (15 000 x R310)

(4 650 000)

(1)

Less: Opening stock (s 22(2)) - Richmountain shares (7 000 x R17)

(119 000)

(1)

Add back: Recoupment ito s 9C(5) - Richmountain shares 119 000 (1)

Taxable capital gain ito s 9C:

(1)

Proceeds: R2 709 000 (7 000 x R387)

2 709 000

(1)

Less: Base cost: R154 000 (7 000 x R22)

(154 000)

(1)

Aggregate capital gain 2 555 000

Less: Annual exclusion (40 000) (½)


Taxable capital gain: 40% x R2 525 000 1 006 000 (½)

Total effect on taxable income 1 606 000

Total marks 8

Maximum 7

(c) (5 marks)

In terms of section 9(2)(b) interest is received from a source within the Republic if the debtor is a resident OR if the funds are utilised in the Republic. Paulina is the debtor and a resident and the funds are also utilised (only one of the criteria needs to be satisfied) in the Republic (South Africa). Therefore, the R70 000 is received from a source within the Republic and must be included in Kyle's gross income.

(1)

(1) (1)

Kyle will be liable for 15% withholding tax on the interest that he received in terms of section 50B(1) if he does not qualify for a section 50D(1) exemption. Because Paulina is not a banking institution or a listed financial institution, withholding tax will apply. Withholding tax at 15% (15% x R70 000 = R10 500) must be withheld by Paulina and paid over to SARS. The interest is exempt from income tax in terms of section 10(1)(h).

(1)

(1)

1

146 TAX4861/104

[Note: To qualify for the section 10(1)(h) exemption he should not have been physically present in the Republic for a period exceeding 183 days in aggregate in the 12-month period preceding the date on which the interest is received by him and the debt from which the interest arises is not connected to a permanent establishment of him in the Republic.]

Total marks 6

Maximum 5

____________________________________ END OF TUTORIAL LETTER

© UNISA 2017

147 TAX4861/104

ANNEXURE A: DTA’S

GN 172 of 31 January 2003: Convention between the Government of the Republic of South

Africa and the Government of the United Kingdom of Great Britain and Northern Ireland

for the avoidance of double taxation and the prevention of fiscal evasion with respect to

taxes on income and on capital gains

as amended by

Notice Government Gazette Date

GN 52 34971

2 February 2012

(w.e.f. 13 October

2011)

GENERAL NOTE

If, in a convention for the avoidance of double taxation that may subsequently be concluded

between South Africa and a third State, the rates for taxation of dividends in the source

State are lower than those specified in sub-paragraphs 2 (a) and (c) of Article 10 as

amended, South Africa shall immediately inform the Government of the United Kingdom of

Great Britain and Northern Ireland in writing through the diplomatic channel and shall

enter into negotiations with the Government of the United Kingdom and Northern Ireland

with a view to providing comparable treatment as may be provided for the third State.

SOUTH AFRICAN REVENUE SERVICES

In terms of section 108 (2) of the income Tax Act, 1962 (Act No. 58 of 1962), read in

conjunction with section 231 (4) of the Constitution of the Republic of South Africa, 1996 (Act

No. 108 of 1996), it is hereby notified that the Convention for the avoidance of double taxation

and the prevention of fiscal evasion with respect to taxes on income and on capital gains set out in

the Schedule to this Notice has been entered into with the Government of the United Kingdom of

Great Britain and Northern Ireland and has been approved by Parliament in terms of section

231 (2) of the Constitution.

It is further notified in terms of paragraph 1 of Article 27 of the Convention, that the date of

entry into force is 17 December 2002.

ARRANGEMENT OF REGULATIONS

Preamble

Article 1 Persons Covered

Article 2 Taxes Covered

Article 3 General Definitions

Article 4 Residence

Article 5 Permanent Establishment

Article 6 Income from Immovable Property

Article 7 Business Profits

Article 8 Shipping and Air Transport

Article 9 Associated Enterprises

Article 10 Dividends

Article 11 Interest

Article 12 Royalties

Article 13 Capital Gains

Article 14 Income from Employment

Article 15 Directors’ Fees

Article 16 Entertainers and Sportspersons

Article 17 Pensions and Annuities

Article 18 Government Service

Article 19 Students and Apprentices

Article 20 Other Income

Article 21 Elimination of Double Taxation

Article 22 Limitation of Relief

Article 23 Non-discrimination

Article 24 Mutual Agreement Procedure

Article 25 Exchange of Information

Article 25A Assistance in the Collection of Taxes

Article 26 Members of Diplomatic or Permanent Missions and Consular Posts

Article 27 Entry into Force

Article 28 Termination

Preamble.—The Government of the Republic of South Africa and the Government of the

United Kingdom of Great Britain and Northern Ireland desiring to promote and strengthen the

economic relations between the two countries by the conclusion of a new Convention for the

avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income

and on capital gains,

Have agreed as follows:


This Convention shall apply to persons who are residents of one or both of the Contracting

States.


1. This Convention shall apply to taxes on income and on capital gains imposed on behalf of a

Contracting State or of its political subdivisions, irrespective of the manner in which they

are levied.

2. There shall be regarded as taxes on income and on capital gains all taxes imposed on total

income, or on elements of income, including taxes on gains from the alienation of movable

or immovable property.

3. The existing taxes to which this Convention shall apply are in particular:

(a) in the case of South Africa:

(i) the normal tax;

(ii) the secondary tax on companies; and

(iii) the withholding tax on royalties;

(hereinafter referred to as ―South African tax‖);

(b) in the case of the United Kingdom:

(i) the income tax;

(ii) the corporation tax; and

(iii) the capital gains tax;

(hereinafter referred to as ―United Kingdom tax‖).

4. This Convention shall also apply to any identical or substantially similar taxes that are

imposed by either Contracting State after the date of signature of this Convention in addition

to, or in place of, the existing taxes. The competent authorities of the Contracting States

shall notify each other of any significant changes that have been made in their respective

taxation laws.


1. For the purposes of this Convention, unless the context otherwise requires:

(a) the term ―South Africa‖ means the Republic of South Africa and, when used in a

geographical sense, includes the territorial sea thereof as well as any area outside

the territorial sea, including the continental shelf, which has been or may hereafter

be designated, under the laws of South Africa and in accordance with international

law, as an area within which South Africa may exercise sovereign rights or

jurisdiction;

(b) the term ―United Kingdom‖ means Great Britain and Northern Ireland, including

any area outside the territorial sea of the United Kingdom which in accordance

with international law has been or may hereafter be designated, under the laws of

the United Kingdom concerning the Continental Shelf, as an area within which the

rights of the United Kingdom with respect to the sea bed and sub-soil and their

natural resources may be exercised;

(c) the terms ―a Contracting State‖ and ―the other Contracting State‖ mean South

Africa or the United Kingdom, as the context requires;

(d) the term ―business‖ includes the performance of professional services and of other

activities of an independent character;

(e) the term ―company‖ means any body corporate or any entity that is treated as a

body corporate for tax purposes;

(f) the term ―competent authority‖ means:

(i) in the case of South Africa, the Commissioner for the South African Revenue

Service or an authorised representative; and

(ii) in the case of the United Kingdom, the Commissioners of Inland Revenue or

their authorised representative;

(g) the term ―enterprise‖ applies to the carrying on of any business;

(h) the terms ―enterprise of a Contracting State‖ and ―enterprise of the other

Contracting State‖ mean respectively an enterprise carried on by a resident of a

Contracting State and an enterprise carried on by a resident of the other

Contracting State;

(i) the term ―international traffic‖ means any transport by a ship or aircraft operated

by an enterprise of a Contracting State, except when the ship or aircraft is

operated solely between places in the other Contracting State;

(j) the term ―national‖ means:

(i) in relation to South Africa, any individual possessing South African

nationality and any legal person or association deriving its status as such from

the law in force in South Africa; and

(ii) in relation to the United Kingdom, any British citizen, or any British subject

not possessing the citizenship of any other Commonwealth country or

territory, provided such citizen or subject has the right of abode in the United

Kingdom; and any legal person, partnership, association or other entity

deriving its status as such from the law in force in the United Kingdom;

(k) the term ―person‖ includes an individual, a company and any other body of

persons and does not include a partnership;

[Para. (k) amended by GN 52 of 2 February 2012.]

(l) the term ―property investment company‖ means:

(i) in South Africa, a company that may be agreed between the competent

authorities as corresponding to a real estate investment trust;

(ii) in the United Kingdom, a real estate investment trust within the meaning of

section 103 of Finance Act 2006;

[Para. (l) inserted by GN 52 of 2 February 2012.]

(m) the term ―qualifying dividend‖ means:

(i) in South Africa, a dividend that may be agreed between the competent

authorities as being paid out of tax-exempt property income; and

(ii) in the United Kingdom, a dividend from tax-exempt income within the

meaning of section 107 (8) of Finance Act 2006.

[Para. (m) inserted by GN 52 of 2 February 2012.]

2. As regards the application of the provisions of this Convention at any time by a Contracting

State, any term not defined therein shall, unless the context otherwise requires, have the

meaning that it has at that time under the law of that State for the purposes of the taxes to

which this Convention applies, any meaning under the applicable tax laws of that State

prevailing over a meaning given to the term under other laws of that State.

Article 4 Residence

1. For the purposes of this Convention, the term ―resident of a Contracting State‖ means any

person who, under the laws of that State, is liable to tax therein by reason of that person’s

domicile, residence, place of management, place of incorporation or any other criterion of a

similar nature, and also includes that State and any political subdivision or local authority

thereof.

2. Where by reason of the provisions of paragraph 1 of this Article an individual is a resident

of both Contracting States, then that individual’s status shall be determined in accordance

with the following rules:

(a) the individual shall be deemed to be a resident solely of the Contracting State in

which a permanent home is available to the individual; if a permanent home is

available to the individual in both States, the individual shall be deemed to be a

resident solely of the State with which the individual’s personal and economic

relations are closer (centre of vital interests);

(b) if sole residence cannot be determined under the provisions of sub-paragraph (a),

the individual shall be deemed to be a resident solely of the State in which the

individual has an habitual abode;

(c) if the individual has an habitual abode in both Contracting States or in neither of

them, the individual shall be deemed to be a resident solely of the State of which

the individual is a national;

(d) if the individual is a national of both Contracting States or of neither of them, the

competent authorities of the Contracting States shall settle the question by mutual

agreement.

3. Where by reason of the provisions of paragraph 1 of this Article a person other than an

individual is a resident of both Contracting States, then it shall be deemed to be a resident

solely of the State in which its place of effective management is situated.


1. For the purposes of this Convention, the term ―permanent establishment‖ means a fixed

place of business through which the business of an enterprise is wholly or partly carried on.

2. The term ―permanent establishment‖ includes especially:

(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural

resources;

(g) an installation or structure for the exploration for natural resources.

3. The term ―permanent establishment‖ likewise encompasses:

(a) a building site, a construction, assembly or installation project or any supervisory

activity in connection with such site or project, but only where such site, project

or activity continues for a period of more than twelve months;

(b) the performance of professional services or other activities of an independent

character by an individual, but only where those services or activities continue

within a Contracting State for a period or periods exceeding in the aggregate 183

days in any twelve-month period commencing or ending in the fiscal year

concerned.

4. Notwithstanding the preceding provisions of this Article, the term ―permanent

establishment‖ shall be deemed not to include:

(a) the use of facilities solely for the purpose of storage, display or delivery of goods

or merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise

solely for the purpose of storage, display or delivery;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise

solely for the purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing

goods or merchandise, or of collecting information, for the enterprise;

(e) the maintenance of a fixed place of business solely for the purpose of carrying on,

for the enterprise, any other activity of a preparatory or auxiliary character; and

(f) the maintenance of a fixed place of business solely for any combination of

activities mentioned in sub-paragraphs (a) to (e) of this paragraph, provided that

the overall activity of the fixed place of business resulting from this combination

is of a preparatory or auxiliary character.

5. Notwithstanding the provisions of paragraphs 1 and 2 of this Article, where a person – other

than an agent of an independent status to whom paragraph 6 of this Article applies – is

acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an

authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to

have a permanent establishment in that State in respect of any activities which that person

undertakes for the enterprise, unless the activities of such person are limited to those

mentioned in paragraph 4 of this Article which, if exercised through a fixed place of

business, would not make this fixed place of business a permanent establishment under the

provisions of that paragraph.

6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State

merely because it carries on business in that State through a broker, general commission

agent or any other agent of an independent status, provided that such persons are acting in

the ordinary course of their business.

7. The fact that a company which is a resident of a Contracting State controls or is controlled

by a company which is a resident of the other Contracting State, or which carries on

business in that other State (whether through a permanent establishment or otherwise), shall

not of itself constitute either company a permanent establishment of the other.


1. Income derived by a resident of a Contracting State from immovable property (including

income from agriculture or forestry) situated in the other Contracting State may be taxed in

that other State.

2. The term ―immovable property‖ shall have the meaning which it has under the law of the

Contracting State in which the property in question is situated. The term shall in any case

include property accessory to immovable property, livestock and equipment used in

agriculture and forestry, rights to which the provisions of general law respecting landed

property apply, usufruct of immovable property and rights to variable or fixed payments as

consideration for the working of, or the right to work, mineral deposits, sources and other

natural resources. Ships and aircraft shall not be regarded as immovable property.

3. The provisions of paragraph 1 of this Article shall apply to income derived from the direct

use, letting or use in any other form of immovable property.

4. The provisions of paragraphs 1 and 3 of this Article shall also apply to the income from

immovable property of an enterprise.


1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless

the enterprise carries on business in the other Contracting State through a permanent

establishment situated therein. If the enterprise carries on business as aforesaid, the profits of

the enterprise may be taxed in the other State but only so much of them as is attributable to

that permanent establishment.

2. Subject to the provisions of paragraph 3 of this Article, where an enterprise of a Contracting

State carries on business in the other Contracting State through a permanent establishment

situated therein, there shall in each Contracting State be attributed to that permanent

establishment the profits which it might be expected to make if it were a distinct and

separate enterprise engaged in the same or similar activities under the same or similar

conditions and dealing wholly independently with the enterprise of which it is a permanent

establishment.

3. In determining the profits of a permanent establishment, there shall be allowed as deductions

expenses which are incurred for the purposes of the permanent establishment, including

executive and general administrative expenses so incurred, whether in the Contracting State

in which the permanent establishment is situated or elsewhere.

4. No profits shall be attributed to a permanent establishment by reason of the mere purchase

by that permanent establishment of goods or merchandise for the enterprise.

5. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent

establishment shall be determined by the same method year by year unless there is good and

sufficient reason to the contrary.

6. Where profits include items of income or capital gains which are dealt with separately in

other Articles of this Convention, then the provisions of those Articles shall not be affected

by the provisions of this Article.


1. Profits of an enterprise of a Contracting State from the operation of ships or aircraft in

international traffic shall be taxable only in that State.

2. For the purposes of this Article, profits from the operation of ships or aircraft in

international traffic include:

(a) profits from the rental on a bareboat basis of ships or aircraft; and

(b) profits from the use or rental of containers (including trailers and related

equipment for the transport of containers) used for the transport of goods or

merchandise; where such rental or such use or rental, as the case may be, is

incidental to the operation of such ships or aircraft in international traffic.

3. The provisions of paragraph 1 of this Article shall also apply to profits from the participation

in a pool, a joint business or an international operating agency, but only to so much of the

profits so derived as is attributable to the participant in proportion to its share in the joint

operation.


1. Where—

(a) an enterprise of a Contracting State participates directly or indirectly in the

management, control or capital of an enterprise of the other Contracting State, or

(b) the same persons participate directly or indirectly in the management, control or

capital of an enterprise of a Contracting State and an enterprise of the other

Contracting State, and in either case conditions are made or imposed between the

two enterprises in their commercial or financial relations which differ from those

which would be made between independent enterprises, then any profits which

would, but for those conditions, have accrued to one of the enterprises, but, by

reason of those conditions, have not so accrued, may be included in the profits of

that enterprise and taxed accordingly.

2. Where a Contracting State includes in the profits of an enterprise of that State – and taxes

accordingly – profits on which an enterprise of the other Contracting State has been charged

to tax in that other State and the profits so included are profits which would have accrued to

the enterprise of the first-mentioned State if the conditions made between the two enterprises

had been those which would have been made between independent enterprises, then that

other State shall make an appropriate adjustment to the amount of the tax charged therein on

those profits. In determining such adjustment, due regard shall be had to the other provisions

of this Convention and the competent authorities of the Contracting States shall if necessary

consult each other.

Article 10

Dividends

[Article 10 substituted by GN 52 of 2 February 2012.]

1. Dividends paid by a company which is a resident of a Contracting State to a resident of the

other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company

paying the dividends is a resident and according to the laws of that State, but if the

beneficial owner of the dividends is a resident of the other Contracting State, the tax so

charged shall not exceed:

(a) 5 per cent of the gross amount of the dividends if the beneficial owner is a

company which holds at least 10 per cent of the capital of the company paying the

dividends; or

(b) 15 per cent of the gross amount of the dividends in the case of qualifying

dividends paid by a property investment company which is a resident of a

Contracting State; or

(c) 10 per cent of the gross amount of the dividends in all other cases.

3. The term ―dividends‖ as used in this Article means income from shares, or other rights, not

being debt-claims, participating in profits, as well as income from other corporate rights

which is subjected to the same taxation treatment as income from shares by the laws of the

Contracting State of which the company making the distribution is a resident and also

includes any other item which, under the laws of the Contracting State of which the

company paying the dividend is a resident, is treated as a dividend or distribution of a

company.

4. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of

the dividends, being a resident of a Contracting State, carries on business in the other

Contracting State of which the company paying the dividends is a resident, through a

permanent establishment situated therein, and the holding in respect of which the dividends

are paid is effectively connected with such permanent establishment. In such case, the

provisions of Article 7 of this Convention shall apply.

5. Where a company which is a resident of a Contracting State derives profits or income from

the other Contracting State, that other State may not impose any tax on the dividends paid by

the company, except insofar as such dividends are paid to a resident of that other State or

insofar as the holding in respect of which the dividends are paid is effectively connected

with a permanent establishment situated in that other State, nor subject the company’s

undistributed profits to a tax on undistributed profits, even if the dividends paid or the

undistributed profits consist wholly or partly of profits or income arising in such other State.

6. The provisions of this Article shall not apply if it was the main purpose or one of the main

purposes of any person concerned with the creation or assignment of the shares or other

rights in respect of which the dividend is paid to take advantage of this Article by means of

that creation or assignment.

Article 11 Interest

1. Interest arising in a Contracting State and paid to a resident of the other Contracting State

shall be taxable only in that other State, if such resident is the beneficial owner of the

interest.

2. The term ―interest‖ as used in this Article means income from debt-claims of every kind,

whether or not secured by mortgage and whether or not carrying a right to participate in the

debtor’s profits, and in particular, income from government securities and income from

bonds or debentures. The term ―interest‖ shall not include any item which is treated as a

dividend under the provisions of Article 10 of this Convention.

3. The provisions of paragraph 1 of this Article shall not apply if the beneficial owner of the

interest, being a resident of a Contracting State, carries on business in the other Contracting

State in which the interest arises, through a permanent establishment situated therein, and

the debt-claim in respect of which the interest is paid is effectively connected with such

permanent establishment. In such case, the provisions of Article 7 of this Convention shall

apply.

4. Where, by reason of a special relationship between the payer and the beneficial owner or

between both of them and some other person, the amount of the interest paid exceeds, for

whatever reason, the amount which would have been agreed upon by the payer and the

beneficial owner in the absence of such relationship, the provisions of this Article shall

apply only to the last-mentioned amount. In such case, the excess part of the payments shall

remain taxable according to the laws of each Contracting State, due regard being had to the

other provisions of this Convention.


purposes of any person concerned with the creation or assignment of the debt-claim in

respect of which the interest is paid to take advantage of this Article by means of that

creation or assignment.


1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State

shall be taxable only in that other State, if such resident is the beneficial owner of the

royalties.

2. The term ―royalties‖ as used in this Article means payments of any kind received as a

consideration for the use of, or the right to use, any copyright of literary, artistic or scientific

work (including cinematograph films, and films, tapes or discs for radio or television

broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or

for information (know-how) concerning industrial, commercial or scientific experience.

3. The provisions of paragraph 1 of this Article shall not apply if the beneficial owner of the

royalties, being a resident of a Contracting State, carries on business in the other Contracting

State in which the royalties arise, through a permanent establishment situated therein, and

the right or property in respect of which the royalties are paid is effectively connected with

such permanent establishment. In such case, the provisions of Article 7 of this Convention

shall apply.


between both of them and some other person, the amount of the royalties paid exceeds, for

whatever reason, the amount which would have been agreed upon by the payer and the

beneficial owner in the absence of such relationship, the provisions of this Article shall

apply only to the last-mentioned amount. In such case, the excess part of the payments shall

remain taxable according to the laws of each Contracting State, due regard being had to the

other provisions of this Convention.


purposes of any person concerned with the creation or assignment of the rights in respect of

which the royalties are paid to take advantage of this Article by means of that creation or

assignment.


1. Gains derived by a resident of a Contracting State from the alienation of immovable

property referred to in Article 6 of this Convention and situated in the other Contracting

State may be taxed in that other State.

2. Gains derived by a resident of a Contracting State from the alienation of:

(a) shares, other than shares quoted on an approved Stock Exchange, deriving their

value or the greater part of their value directly or indirectly from immovable

property situated in the other Contracting State, or

(b) an interest in a partnership or trust the assets of which consist principally of

immovable property situated in the other Contracting State, or of shares referred

to in sub-paragraph (a) of this paragraph, may be taxed in that other State.

3. Gains from the alienation of movable property forming part of the business property of a

permanent establishment which an enterprise of a Contracting State has in the other

Contracting State, including such gains from the alienation of such a permanent

establishment (alone or with the whole enterprise), may be taxed in that other State.

4. Gains derived by a resident of a Contracting State from the alienation of ships or aircraft

operated in international traffic by an enterprise of that Contracting State or movable

property pertaining to the operation of such ships or aircraft, shall be taxable only in that

Contracting State.

5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and

4 of this Article shall be taxable only in the Contracting State of which the alienator is a

resident.

6. The provisions of paragraph 5 of this Article shall not affect the right of a Contracting State

to levy according to its law a tax on capital gains from the alienation of any property derived

by an individual who is a resident of the other Contracting State and has been a resident of

the first-mentioned Contracting State at any time during the six years immediately preceding

the alienation of the property if the property was held by that individual, or by the spouse of

that individual, before that individual became a resident of that other State.


1. Subject to the provisions of Articles 15, 17 and 18 of this Convention, salaries, wages and

other similar remuneration derived by a resident of a Contracting State in respect of an

employment shall be taxable only in that State unless the employment is exercised in the

other Contracting State. If the employment is so exercised, such remuneration as is derived

therefrom may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a

resident of a Contracting State in respect of an employment exercised in the other

Contracting State shall be taxable only in the first-mentioned State if:

(a) the recipient is present in the other State for a period or periods not exceeding in

the aggregate 183 days in any twelve-month period commencing or ending in the

fiscal year concerned, and

(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of

the other State, and

(c) the remuneration is not borne by a permanent establishment which the employer

has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of

an employment exercised aboard a ship or aircraft operated in international traffic may be

taxed in the Contracting State of which the enterprise operating the ship or aircraft is a

resident.


Directors’ fees and other similar payments derived by a resident of a Contracting State in

that person’s capacity as a member of the board of directors of a company which is a resident of

the other Contracting State may be taxed in that other State.


1. Notwithstanding the provisions of Articles 7 and 14 of this Convention, income derived by a

resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or

television artiste, or a musician, or as a sportsperson, from that person’s personal activities

as such exercised in the other Contracting State, may be taxed in that other State.

2. Where income in respect of personal activities exercised by an entertainer or a sportsperson

in that person’s capacity as such accrues not to the entertainer or sportsperson but to another

person, that income may, notwithstanding the provisions of Articles 7 and 14 of this

Convention, be taxed in the Contracting State in which the activities of the entertainer or

sportsperson are exercised.

3. The provisions of paragraphs 1 and 2 of this Article shall not apply to income derived by a

resident of a Contracting State from activities exercised in the other Contracting State as

envisaged in paragraphs 1 and 2 of this Article, if the visit to that other State is supported

wholly or mainly by public funds of the first-mentioned Contracting State, a political

subdivision or a local authority thereof, or takes place under a cultural agreement or

arrangement between the Governments of the Contracting States. In such a case, the income

shall be taxable only in the first-mentioned Contracting State.

Article 17 Pensions and Annuities

1. Subject to the provisions of paragraph 2 of Article 18 of this Convention:

(a) pensions and other similar remuneration paid in consideration of past

employment, and

(b) any annuity paid, to an individual who is a resident of a Contracting State shall be

taxable only in that State.

2. The term ―annuity‖ means a stated sum payable to an individual periodically at stated times

during life or during a specified or ascertainable period of time under an obligation to make

the payments in return for adequate and full consideration in money or money’s worth.

3. (a) Contributions borne by an individual who is in employment in a Contracting State

to a pension scheme established in and recognised for tax purposes in the other

Contracting State shall be deducted, in the first-mentioned State, in determining

the individual’s taxable income, and treated in that State, in the same way and

subject to the same conditions and limitations as contributions made to a pension

scheme that is recognised for tax purposes in that first-mentioned State, provided

that:

(i) the individual was not a resident of that State, and was contributing to the

pension scheme, or to another pension scheme for which it has been

substituted, immediately before that individual began to exercise employment

in that State; and

(ii) the pension scheme is accepted by the competent authority of that State as

generally corresponding to a pension scheme recognised as such for tax

purposes by that State.

(b) Contributions to a pension scheme referred to in sub-paragraph (a) of this

paragraph by the enterprise paying the remuneration of that individual shall not be

treated as the taxable income of that individual and shall be allowed as a

deduction in computing the profits of the enterprise.

(c) For the purposes of sub-paragraph (a) of this paragraph:

(i) the term ―a pension scheme‖ means an arrangement in which the individual

participates in order to secure retirement benefits payable in respect of the

employment referred to in sub-paragraph (a); and

(ii) a pension scheme is recognised for tax purposes in a State if the contributions

to the scheme would qualify for tax relief in that State.


1. (a) Salaries, wages and other similar remuneration, other than a pension, paid by a

Contracting State or a political subdivision or a local authority thereof to an

individual in respect of services rendered to that State or subdivision or authority

shall be taxable only in that State.

(b) Notwithstanding the provisions of sub-paragraph (a) of this paragraph, such

salaries, wages and other similar remuneration shall be taxable only in the other

Contracting State if the services are rendered in that State and the individual is a

resident of that State who:

(i) is a national of that State; or

(ii) did not become a resident of that State solely for the purpose of rendering the

services.

2. (a) Any pension paid by, or out of funds created by, a Contracting State or a political

subdivision or a local authority thereof to an individual in respect of services

rendered to that State or subdivision or authority shall be taxable only in that

State.

(b) Notwithstanding the provisions of sub-paragraph (a) of this paragraph, such

pension shall be taxable only in the other Contracting State if the individual is a

resident of, and a national of, that State.

3. The provisions of Articles 14, 15, 16, and 17 of this Convention shall apply to salaries,

wages and other similar remuneration, and to pensions, in respect of services rendered in

connection with a business carried on by a Contracting State or a political subdivision or a

local authority thereof.


A student or apprentice who is present in a Contracting State solely for the purpose of that

student or apprentice’s education or training and who is, or immediately before being so present

was, a resident of the other Contracting State, shall be exempt from tax in the first-mentioned

State on payments received from outside that first-mentioned State for the purposes of that

student or apprentice’s maintenance, education or training.


1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the

foregoing Articles of this Convention shall be taxable only in that State.

2. The provisions of paragraph 1 of this Article shall not apply to income, other than income

from immovable property as defined in paragraph 2 of Article 6 of this Convention, if the

recipient of such income, being a resident of a Contracting State, carries on business in the

other Contracting State through a permanent establishment situated therein, and the right or

property in respect of which the income is paid is effectively connected with such permanent

establishment. In such case, the provisions of Article 7 of this Convention shall apply.

3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a

Contracting State not dealt with in the foregoing Articles of this Convention and arising in

the other Contracting State may also be taxed in that other State.


1. Subject to the provisions of the law of South Africa regarding the deduction from tax

payable in South Africa of tax payable in any country other than South Africa, United

Kingdom tax paid by residents of South Africa in respect of income taxable in the United

Kingdom, in accordance with the provisions of this Convention, shall be deducted from the

taxes due according to South African fiscal law. Such deduction shall not, however, exceed

an amount which bears to the total South African tax payable the same ratio as the income

concerned bears to the total income.

2. Subject to the provisions of the law of the United Kingdom regarding the allowance as a

credit against United Kingdom tax of tax payable in a territory outside the United Kingdom

(which shall not affect the general principle hereof):

(a) South African tax payable under the laws of South Africa and in accordance with

this Convention, whether directly or by deduction, on profits, income or

chargeable gains from sources within South Africa (excluding in the case of a

dividend, tax payable in respect of the profits out of which the dividend is paid)

shall be allowed as a credit against any United Kingdom tax computed by

reference to the same profits, income or chargeable gains by reference to which

the South African tax is computed;

(b) in the case of a dividend paid by a company which is a resident of South Africa to

a company which is a resident of the United Kingdom and which controls directly

or indirectly at least 10 per cent. of the voting power in the company paying the

dividend, the credit shall take into account (in addition to any South African tax

for which credit may be allowed under the provisions of sub-paragraph (a) of this

paragraph) the South African tax payable by the company in respect of the profits

out of which such dividend is paid.

3. For the purposes of paragraph 2 of this Article, profits, income and capital gains owned by a

resident of the United Kingdom which may be taxed in South Africa in accordance with this

Convention shall be deemed to arise from sources in South Africa.

Article 22 Limitation of Relief

Where under any provision of this Convention any income or gains are relieved from tax

in a Contracting State and, under the law in force in the other Contracting State a person, in

respect of that income or those gains, is subject to tax by reference to the amount thereof which is

remitted to or received in that other Contracting State and not by reference to the full amount

thereof, then the relief to be allowed under this Convention in the first-mentioned Contracting

State shall apply only to so much of the income or gains as is taxed in the other Contracting State.


1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any

taxation or any requirement connected therewith, which is other or more burdensome than

the taxation and connected requirements to which nationals of that other State in the same

circumstances, in particular with respect to residence, are or may be subjected.

2. The taxation on a permanent establishment which an enterprise of a Contracting State has in

the other Contracting State shall not be less favourably levied in that other State than the

taxation levied on enterprises of that other State carrying on the same activities.

3. Except where the provisions of paragraph 1 of Article 9, paragraph 4 or 5 of Article 11, or

paragraph 4 or 5 of Article 12 of this Convention apply, interest, royalties and other

disbursements paid by an enterprise of a Contracting State to a resident of the other

Contracting State shall, for the purpose of determining the taxable profits of such enterprise,

be deductible under the same conditions as if they had been paid to a resident of the first-

mentioned State.

4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or

controlled, directly or indirectly, by one or more residents of the other Contracting State,

shall not be subjected in the first-mentioned State to any taxation or any requirement

connected therewith which is other or more burdensome than the taxation and connected

requirements to which other similar enterprises of the first-mentioned State are or may be

subjected.

5. Nothing in this Article shall be construed as obliging either Contracting State to grant to

individuals not resident in that State any of the personal allowances, reliefs and reductions

for tax purposes which are granted to individuals so resident.

6. Nothing in this Article shall prevent South Africa from imposing on the profits attributable

to a permanent establishment in South Africa of a company, which is a resident of the

United Kingdom, a tax at a rate which does not exceed the rate of normal tax on companies

by more than five percentage points.

7. The provisions of this Article shall apply to the taxes which are the subject of this

Convention.


1. Where a resident of a Contracting State considers that the actions of one or both of the

Contracting States result or will result for that person in taxation not in accordance with the

provisions of this Convention, that person may, irrespective of the remedies provided by the

domestic law of those States, present a case to the competent authority of the Contracting

State of which the person is a resident or, if the case comes under paragraph 1 of Article 23

of this Convention, to that of the Contracting State of which the person is a national.

2. The competent authority shall endeavour, if the objection appears to it to be justified and if it

is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement

with the competent authority of the other Contracting State, with a view to the avoidance of

taxation which is not in accordance with this Convention.

3. The competent authorities of the Contracting States shall endeavour to resolve by mutual

agreement any difficulties or doubts arising as to the interpretation or application of this

Convention. They may also consult together for the elimination of double taxation in cases

not provided for in this Convention.

4. The competent authorities of the Contracting States may communicate with each other

directly for the purpose of reaching an agreement in the sense of the preceding paragraphs.

Article 25

Exchange of Information

[Article 25 substituted by GN 52 of 2 February 2012.]

1. The competent authorities of the Contracting States shall exchange such information as is

foreseeably relevant for carrying out the provisions of this Convention or to the

administration or enforcement of the domestic laws of the Contracting States concerning

taxes of every kind and description imposed on behalf of the Contracting States, or of their

political subdivisions, insofar as the taxation thereunder is not contrary to the Convention.

The exchange of information is not restricted by Articles 1 and 2 of the Convention.

2. Any information received under paragraph 1 of this Article by a Contracting State shall be

treated as secret in the same manner as information obtained under the domestic laws of that

State and shall be disclosed only to persons or authorities (including courts and

administrative bodies) concerned with the assessment or collection of, the enforcement or

prosecution in respect of, the determination of appeals in relation to the taxes referred to in

paragraph 1, or the oversight of the above. Such persons or authorities shall use the

information only for such purposes. They may disclose the information in public court

proceedings or in judicial decisions.

3. In no case shall the provisions of paragraphs 1 and 2 of this Article be construed so as to

impose on a Contracting State the obligation:

(a) to carry out administrative measures at variance with the laws and administrative

practice of that or of the other Contracting State;

(b) to supply information which is not obtainable under the laws or in the normal

course of the administration of that or of the other Contracting State;

(c) to supply information which would disclose any trade, business, industrial,

commercial or professional secret or trade process, or information the disclosure

of which would be contrary to public policy.

4. If information is requested by a Contracting State in accordance with this Article, the other

Contracting State shall use its information gathering measures to obtain the requested

information, even though that other State may not need such information for its own tax

purposes. The obligation contained in the preceding sentence is subject to the limitations of

paragraph 3 of this Article but in no case shall such limitations be construed to permit a

Contracting State to decline to supply information solely because it has no domestic interest

in such information.

5. In no case shall the provisions of paragraph 3 of this Article be construed to permit a

Contracting State to decline to supply information solely because the information is held by

a bank, other financial institution, nominee or person acting in an agency or a fiduciary

capacity or because it relates to ownership interests in a person.

Article 25A

Assistance in the Collection of Taxes

[Article 25A inserted by GN 52 of 2 February 2012.]

1. The Contracting States shall lend assistance to each other in the collection of revenue

claims. This assistance is not restricted by Articles 1 and 2 of this Convention. The

competent authorities of the Contracting States may by mutual agreement settle the mode of

application of this Article.

2. The term ―revenue claim‖ as used in this Article means an amount owed in respect of taxes

of every kind and description imposed on behalf of the Contracting States, or of their

political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to

the Convention or any other instrument to which the Contracting States are parties, as well

as interest, administrative penalties and costs of collection or conservancy related to such

amount.

3. When a revenue claim of a Contracting State is enforceable under the laws of that State and

is owed by a person who, at that time, cannot, under the laws of that State, prevent its

collection, that revenue claim shall, at the request of the competent authority of that State, be

accepted for purposes of collection by the competent authority of the other Contracting

State. That revenue claim shall be collected by that other State in accordance with the

provisions of its laws applicable to the enforcement and collection of its own taxes as if the

revenue claim were a revenue claim of that other State.

4. When a revenue claim of a Contracting State is a claim in respect of which that State may,

under its law, take measures of conservancy with a view to ensure its collection, that

revenue claim shall, at the request of the competent authority of that State, be accepted for

purposes of taking measures of conservancy by the competent authority of the other

Contracting State. That other State shall take measures of conservancy in respect of that

revenue claim in accordance with the provisions of its laws as if the revenue claim were a

revenue claim of that other State even if, at the time when such measures are applied, the

revenue claim is not enforceable in the first-mentioned State or is owed by a person who has

a right to prevent its collection.

5. Notwithstanding the provisions of paragraphs 3 and 4 of this Article, a revenue claim

accepted by a Contracting State for purposes of paragraph 3 or 4 shall not, in that State, be

subject to the time limits or accorded any priority applicable to a revenue claim under the

laws of that State by reason of its nature as such. In addition, a revenue claim accepted by a

Contracting State for the purposes of paragraph 3 or 4 shall not, in that State, have any

priority applicable to that revenue claim under the laws of the other Contracting State.

6. Proceedings with respect to the existence, validity or the amount of a revenue claim of a

Contracting State shall not be brought before the courts or administrative bodies of the other

Contracting State.

7. Where, at any time after a request has been made by a Contracting State under paragraph 3

or 4 of this Article and before the other Contracting State has collected and remitted the

relevant revenue claim to the first-mentioned State, the relevant revenue claim ceases to be:

(a) in the case of a request under paragraph 3, a revenue claim of the first-mentioned

State that is enforceable under the laws of that State and is owed by a person who,

at that time, cannot, under the laws of that State, prevent its collection; or

(b) in the case of a request under paragraph 4, a revenue claim of the first-mentioned

State in respect of which that State may, under its laws, take measures of

conservancy with a view to ensure its collection,

the competent authority of the first-mentioned State shall promptly notify the competent

authority of the other State of that fact and, at the option of the other State, the first-

mentioned State shall either suspend or withdraw its request.

8. In no case shall the provisions of this Article be construed so as to impose on a Contracting

State the obligation:



(b) to carry out measures which would be contrary to public policy;

(c) to provide assistance if the other Contracting State has not pursued all reasonable

measures of collection or conservancy, as the case may be, available under its

laws or administrative practice;

(d) to provide assistance in those cases where the administrative burden for that State

is clearly disproportionate to the benefit to be derived by the other Contracting

State;

(e) to provide assistance if that State considers that the taxes with respect to which

assistance is requested are imposed contrary to generally accepted taxation

principles.

Article 26 Members of Diplomatic or Permanent Missions and Consular Posts

1. Nothing in this Convention shall affect the fiscal privileges of members of diplomatic or

permanent missions or consular posts under the general rules of international law or under

the provisions of special agreements.

2. Notwithstanding the provisions of paragraph 1 of Article 4 of this Convention, an individual

who is a member of a diplomatic or permanent mission or consular post of a Contracting

State or of any third State which is situated in the other Contracting State or who is an

official of an international organisation, and any member of the family of such an individual,

shall not be deemed to be a resident of the other State for the purposes of this Convention if

the individual is subject to tax on income or capital gains in that other State only if the

individual derives income or capital gains from sources therein.


1. Each of the Contracting States shall notify to the other, through the diplomatic channel, the

completion of the procedures required by its law for the bringing into force of this

Convention. This Convention shall enter into force on the date of receipt of the later of these

notifications and shall thereupon have effect:

(a) in South Africa:

(i) with regard to taxes withheld at source, in respect of amounts paid or credited

on or after 1st January next following the date upon which this Convention

enters into force; and

(ii) with regard to other taxes, in respect of taxable years beginning on or after 1st

January next following the date upon which this Convention enters into force;

(b) in the United Kingdom:

(i) in respect of income tax and capital gains tax, for any year of assessment

beginning on or after 6th April in the calendar year next following that in

which this Convention enters into force;

(ii) in respect of corporation tax, for any financial year beginning on or after 1st

April in the calendar year next following that in which this Convention enters

into force.

2. The Convention between the Government of the Republic of South Africa and the

Government of the United Kingdom of Great Britain and Northern Ireland signed at London

on 21st November, 1968, shall be terminated and shall cease to have effect in respect of the

taxes to which this Convention applies in accordance with the provisions of paragraph 1 of

this Article.


This Convention shall remain in force until terminated by one of the Contracting States.

Either Contracting State may terminate this Convention, through the diplomatic channel, by

giving notice of termination at least six months before the end of any calendar year beginning

after the expiry of five years from the date of entry into force of this Convention. In such event,

this Convention shall cease to have effect:

(a) in South Africa:

(i) with regard to taxes withheld at source, in respect of amounts paid or credited

after the end of the calendar year in which such notice is given; and

(ii) with regard to other taxes, in respect of taxable years beginning after the end

of the calendar year in which such notice is given;

(b) in the United Kingdom:

(i) in respect of income tax and capital gains tax, for any year of assessment

beginning on or after 6th April in the calendar year next following that in

which the notice is given;

(ii) in respect of corporation tax, for any financial year beginning on or after 1st

April in the calendar year next following that in which the notice is given.

IN WITNESS WHEREOF the undersigned, duly authorised thereto by their respective

Governments, have signed this Convention.

DONE in duplicate at London this 4th day of July 2002.

T. A. MANUEL G. BROWN

FOR THE GOVERNMENT OF THE

REPUBLIC OF SOUTH AFRICA


UNITED KINGDOM OF GREAT

BRITAIN AND NORTHERN IRELAND

London

4 July 2002

Excellency

I have the honour to refer to the Convention between the Government of the United Kingdom

of Great Britain and Northern Ireland and the Government of the Republic of South Africa for

the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes

on Income and on Capital Gains which has been signed today and to make on behalf of the

Government of the United Kingdom the following proposal:

Article 2 (Taxes Covered) paragraph 3.

It is understood that the secondary tax on companies is a tax payable in respect of the profits

of South African companies and the allowance as a credit for this tax against United Kingdom

tax is to be determined in accordance with the terms of sub-paragraph (b) of paragraph 2 of

Article 21 of the Convention.

If the foregoing proposal is acceptable to the Government of the Republic of South Africa, I

have the honour to suggest that the present Note and Your Excellency’s reply to that effect

should be regarded as constituting an agreement between the two Governments in this matter,

which shall enter into force at the same time as the entry into force of the Convention.

I avail myself of this opportunity to extend to Your Excellency the assurance of my highest

consideration.

of Great Britain and Northern Ireland (Signed) G. BROWN

Excellency

I have the honour to acknowledge receipt of Your Excellency’s Note dated 4 July 2002 which

reads as follows:

―I have the honour to refer to the Convention between the Government of the United Kingdom

of Great Britain and Northern Ireland and the Government of the Republic of South Africa for

the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes

on Income and on Capital Gains which has been signed today and to make on behalf of the

Government of the United Kingdom the following proposal:

Article 2 (Taxes Covered) paragraph 3.

It is understood that the secondary tax on companies is a tax payable in respect of the profits

of South African companies and the allowance as a credit for this tax against United Kingdom

tax is to be determined in accordance with the terms of sub-paragraph (b) of paragraph 2 of

Article 21 of the Convention.

If the foregoing proposal is acceptable to the Government of the Republic of South Africa, I

have the honour to suggest that the present Note and Your Excellency’s reply to that effect

should be regarded as constituting an agreement between the two Governments in this matter,

which shall enter into force at the same time as the entry into force of the Convention.‖

The foregoing proposal being acceptable to the Government of the Republic of South Africa, I

have the honour to confirm that Your Excellency’s Note and this reply shall be regarded as

constituting an agreement between the two Governments in this matter which shall enter into

force at the same time as the entry into force of the Convention.

I take this opportunity to renew to Your Excellency the assurance of my highest consideration.

(Signed) T. A. MANUEL

GN 34 of 23 January 2009: Convention between the Republic of South Africa and the

Kingdom of the Netherlands for the avoidance of double taxation and the prevention of

fiscal evasion with respect to taxes on income and on capital

(Government Gazette No. 31797)

as amended by

Notice Government Gazette Date

32 31795 23 January 2009

w.e.f. 28 December

2008

Preamble

The Government of the Republic of South Africa and the Government of the Kingdom of the

Netherlands, desiring that the convention between the Republic of South Africa and the Kingdom

of the Netherlands for the avoidance of double taxation and the prevention of fiscal evasion with

respect to taxes on income and on capital, with Protocol, signed at Pretoria on 10 October 2005

(in this Protocol referred to as ―the Convention‖), be amended by both States,


CHAPTER 1

SCOPE OF THE CONVENTION

ARTICLE 1

Persons Covered


States.

ARTICLE 2

Taxes Covered

1. This Convention shall apply to taxes on income and on capital imposed on behalf of a

Contracting State or of its political subdivisions or local authorities, irrespective of the manner in

which they are levied.

2. There shall be regarded as taxes on income and on capital all taxes imposed on total

income, on total capital, or on elements of income or of capital, including taxes on gains from the

alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid

by enterprises, as well as taxes on capital appreciation.

3. The existing taxes to which the Convention shall apply are in particular:

(a) in the Netherlands:

(i) de inkomstenbelasting (income tax),

(ii) de loonbelasting (wages tax),

(iii) de vennootschapsbelasting (company tax) including the Government share in

the net profits of the exploitation of natural resources levied pursuant to the

Mijnwet 1810 (the Mining Act of 1810) with respect to concessions issued

from 1967, or pursuant to the Mijnwet Continentaal Plat 1965 (the

Netherlands Continental Shelf Mining Act of 1965),

(iv) de dividendbelasting (dividend tax), and

(v) de vermogensbelasting (capital tax),

(hereinafter referred to as ―Netherlands tax‖);

(b) in South Africa:

(i) the normal tax,

(ii) the secondary tax on companies, and

(iii) the withholding tax on royalties,

(hereinafter referred to as ―South African tax‖).

4. The Convention shall apply also to any identical or substantially similar taxes, including

taxes on dividends, that are imposed by either Contracting State after the date of signature of the

Convention in addition to, or in place of, the existing taxes. The competent authorities of the

Contracting States shall notify each other of any significant changes that have been made in their

respective taxation laws.

[Sub-article 4 substituted by article I of GN 32 of 23 January 2009 w.e.f. 28 December

2008.]

CHAPTER II

DEFINITIONS

ARTICLE 3

General Definitions


(a) the terms ―a Contracting State‖ and ―the other Contracting State‖ mean the

Kingdom of the Netherlands (the Netherlands) or the Republic of South Africa

(South Africa), as the context requires;

(b) the term ―the Netherlands‖ means the part of the Kingdom of the Netherlands that

is situated in Europe, including its territorial sea, and any area beyond the

territorial sea within which the Netherlands, in accordance with international law,

exercises jurisdiction or sovereign rights with respect to the seabed, its subsoil and

its superjacent waters, and their natural resources;

(c) the term ―South Africa‖ means the Republic of South Africa and, when used in a





jurisdiction;



(e) the term ―person‖ includes an individual, a company and any other body of

persons;

(f) the term ―company‖ means any body corporate or any entity that is treated as a



(h) the terms ―enterprise of a Contracting State‖ and ―enterprise of the other



Contracting State;

(i) the term ―international traffic‖ means any transport by a ship or aircraft operated

by an enterprise that has its place of effective management in a Contracting State,

except when the ship or aircraft is operated solely between places in the other

Contracting State;

(j) the term ―national‖ means:

(i) any individual possessing the nationality of a Contracting State;

(ii) any legal person, partnership or association deriving its status as such from

the laws in force in a Contracting State;

(k) the term ―competent authority‖ means:

(i) in the Netherlands, the Minister of Finance or an authorized representative;

(ii) in South Africa, the Commissioner for the South African Revenue Service or

an authorised representative.

2. As regards the application of the provisions of the Convention at any time by a

Contracting State, any term not defined therein shall, unless the context otherwise requires, have

the meaning that it has at that time under the law of that State for the purposes of the taxes to

which the Convention applies, any meaning under the applicable tax laws of that State prevailing

over a meaning given to the term under other laws of that State.

ARTICLE 4

Resident

1. For the purposes of this Convention, the term ―resident of a Contracting State‖ means:

(a) any person who, under the laws of that State, is liable to tax therein by reason of

that person’s domicile, residence, place of management or any other criterion of a

similar nature, and also includes that State and any political subdivision or local

authority thereof. This term, however, does not include any person who is liable to

tax in that State in respect only of income from sources in that State or capital

situated therein;

(b) a pension fund that is recognised and controlled according to the statutory

provisions of a Contracting State and the income of which is generally exempt

from tax in that State.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both

Contracting States, then that individual’s status shall be determined as follows:

(a) the individual shall be deemed to be a resident solely of the State in which a

permanent home is available to the individual; if a permanent home is available to

the individual in both States, the individual shall be deemed to be a resident solely

of the State with which the individual’s personal and economic relations are closer

(centre of vital interests);

(b) if sole residence cannot be determined under the provisions of subparagraph (a),



(c) if the individual has an habitual abode in both States or in neither of them, the

individual shall be deemed to be a resident solely of the State of which the

individual is a national;

(d) if the individual is a national of both States or of neither of them, the competent

authorities of the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1 a person other than an individual is a

resident of both Contracting States, then it shall be deemed to be a resident solely of the State in

which its place of effective management is situated.

ARTICLE 5

Permanent Establishment





(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop, and


resources.

3. A building site, a construction, assembly or installation project or any supervisory

activity in connection with such site or project, constitutes a permanent establishment only if such

site, project or activity lasts more than twelve months.










goods or merchandise or of collecting information, for the enterprise;




activities mentioned in subparagraphs (a) to (e), provided that the overall activity

of the fixed place of business resulting from this combination is of a preparatory

or auxiliary character.

5. Notwithstanding the provisions of paragraphs 1 and 2, where a person – other than an

agent of an independent status to whom paragraph 6 applies – is acting on behalf of an enterprise

and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the

name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that

State in respect of any activities which that person undertakes for the enterprise, unless the

activities of such person are limited to those mentioned in paragraph 4 which, if exercised

through a fixed place of business, would not make this fixed place of business a permanent

establishment under the provisions of that paragraph.

6. An enterprise shall not be deemed to have a permanent establishment in a Contracting

State merely because it carries on business in that State through a broker, general commission

agent or any other agent of an independent status, provided that such persons are acting in the

ordinary course of their business.

7. The fact that a company which is a resident of a Contracting State controls or is

controlled by a company which is a resident of the other Contracting State, or which carries on

business in that other State (whether through a permanent establishment or otherwise), shall not

of itself constitute either company a permanent establishment of the other.

CHAPTER III

TAXATION OF INCOME

ARTICLE 6

Income from Immovable Property

1. Income derived by a resident of a Contracting State from immovable property (including

income from agriculture or forestry) situated in the other Contracting State may be taxed in that

other State.


Contracting State in which the property in question is situated. The term shall in any case include

property accessory to immovable property, livestock and equipment used in agriculture and

forestry, rights to which the provisions of general law respecting landed property apply, usufruct

of immovable property and rights to variable or fixed payments as consideration for the working

of, or the right to work, mineral deposits, sources and other natural resources. Ships, boats and

aircraft shall not be regarded as immovable property.

3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting

or use in any other form of immovable property.

4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable

property of an enterprise.

ARTICLE 7

Business Profits

1. The profits of an enterprise of a Contracting State shall be taxable only in that State

unless the enterprise carries on business in the other Contracting State through a permanent

establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the

enterprise may be taxed in the other State but only so much of them as is attributable to that

permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State

carries on business in the other Contracting State through a permanent establishment situated

therein, there shall in each Contracting State be attributed to that permanent establishment the

profits which it might be expected to make if it were a distinct and separate enterprise engaged in

the same or similar activities under the same or similar conditions and dealing wholly

independently with the enterprise of which it is a permanent establishment.

3. In determining the profits of a permanent establishment, there shall be allowed as

deductions expenses which are incurred for the purposes of the permanent establishment,

including executive and general administrative expenses so incurred, whether in the Contracting

State in which the permanent establishment is situated or elsewhere.

4. Insofar as it has been customary in a Contracting State to determine the profits to be

attributed to a permanent establishment on the basis of an apportionment of the total profits of the

enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from

determining the profits to be taxed by such an apportionment as may be customary. The method

of apportionment adopted shall, however, be such that the result shall be in accordance with the

principles contained in this Article.

5. No profits shall be attributed to a permanent establishment by reason of the mere

purchase by that permanent establishment of goods or merchandise for the enterprise.

6. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent

establishment shall be determined by the same method year by year unless there is good and

sufficient reason to the contrary.

7. Where profits include items of income which are dealt with separately in other Articles of

this Convention, then the provisions of those Articles shall not be affected by the provisions of

this Article.

ARTICLE 8

Shipping and Air Transport

1. Profits from the operation of ships or aircraft in international traffic shall be taxable only

in the Contracting State in which the place of effective management of the enterprise is situated.

2. If the place of effective management of a shipping enterprise is aboard a ship, then it

shall be deemed to be situated in the Contracting State in which the home harbour of the ship is

situated, or, if there is no such home harbour, in the Contracting State of which the operator of the

ship is a resident.

3. For the purposes of this Convention, profits derived by an enterprise of one of the States

from the operation of ships or aircraft in international traffic shall include profits from:

(a) the rental of ships or aircraft operated in international traffic;

(b) the use or rental of containers (including trailers and related equipment for the

transport of containers) used in international traffic; and

(c) the rental of ships, aircraft or containers (including trailers and related equipment

for the transport of containers or the maintenance thereof) provided that such

profits are incidental to profits referred to in paragraph 1, or subparagraphs a) or

b) of this paragraph.

4. The provisions of paragraph 1 shall also apply to profits from the participation in a pool,

a joint business or an international operating agency.

ARTICLE 9

Associated Enterprises

1. Where—











2. Where a Contracting State includes in the profits of an enterprise of that State and taxes

accordingly – profits on which an enterprise of the other Contracting State has been charged to

tax in that other State and the profits so included are profits which would have accrued to the

enterprise of the firstmentioned State if the conditions made between the two enterprises had been

those which would have been made between independent enterprises, then that other State shall

make an appropriate adjustment to the amount of the tax charged therein on those profits. In

determining such adjustment, due regard shall be had to the other provisions of this Convention

and the competent authorities of the Contracting States shall if necessary consult each other.

ARTICLE 10

Dividends

1. Dividends paid by a company which is a resident of a Contracting State to a resident of

the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the

company paying the dividends is a resident and according to the laws of that State, but if the

beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged

shall not exceed:



dividends; or

(b) 10 per cent of the gross amount of the dividends in all other cases.

3. The competent authorities of the Contracting States shall by mutual agreement settle the

mode of application of paragraph 2.

4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of

the profits out of which the dividends are paid.

5. The term ―dividends‖ as used in this Article means income from shares, ―jouissance‖

shares or ―jouissance‖ rights, mining shares, founders’ shares or other rights participating in

profits, as well as income from debt-claims participating in profits and income from other

corporate rights which is subjected to the same taxation treatment as income from shares by the

laws of the State of which the company making the distribution is a resident.

6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the

dividends, being a resident of a Contracting State, carries on business in the other Contracting

State of which the company paying the dividends is a resident, through a permanent

establishment situated therein and the holding in respect of which the dividends are paid is

effectively connected with such permanent establishment. In such case the provisions of Article 7

shall apply.

7. Where a company which is a resident of a Contracting State derives profits or income

from the other Contracting State, that other State may not impose any tax on the dividends paid

by the company, except insofar as such dividends are paid to a resident of that other State or

insofar as the holding in respect of which the dividends are paid is effectively connected with a

permanent establishment situated in that other State, nor subject the company’s undistributed

profits to a tax on the company’s undistributed profits, even if the dividends paid or the

undistributed profits consist wholly or partly of profits or income arising in such other State.

8. The provisions of this Article shall not apply if it was the main purpose or one of the

main purposes of any person concerned with the creation or assignment of the shares or other

rights in respect of which the dividend is paid to take advantage of this Article by means of that


9. Notwithstanding the provisions of paragraphs 1, 2 and 7, dividends paid by a company

whose capital is divided into shares and which under the laws of a State is a resident of that State,

to an individual who is a resident of the other State may be taxed in the firstmentioned State in

accordance with the laws of that State, if that individual – either alone or with his or her spouse –

or one of their relations by blood or marriage in the direct line directly or indirectly holds at least

5 per cent of the issued capital of a particular class of shares in that company. This provision shall

apply only if the individual to whom the dividends are paid has been a resident of the

firstmentioned State in the course of the last ten years preceding the year in which the dividends

are paid and provided that, at the time the individual became a resident of the other State, the

abovementioned conditions regarding share ownership in the said company were satisfied.

In cases where, under the domestic laws of the firstmentioned State, an assessment has been

issued to the individual to whom the dividends are paid in respect of the alienation of the

aforesaid shares deemed to have taken place at the time of the individual’s emigration from the

firstmentioned State, the above shall apply only as long as part of the assessment is still due.

10. If under any convention for the avoidance of double taxation concluded after the date of

conclusion of this Convention between the Republic of South Africa and a third country, South

Africa limits its taxation on dividends as contemplated in subparagraph (a) of paragraph 2 of this

Article to a rate lower, including exemption from taxation or taxation on a reduced taxable base,

than the rate provided for in subparagraph (a) of paragraph 2 of this Article, the same rate, the

same exemption or the same reduced taxable base as provided for in the convention with that

third State shall automatically apply in both Contracting States under this Convention as from the

date of the entry into force of the convention with that third State.

[Article 10 substituted by article II of GN 32 of 23 January 2009 w.e.f. 28 December 2008.]

ARTICLE 11

Interest

1. Interest arising in a Contracting State and beneficially owned by a resident of the other

Contracting State shall be taxable only in that other State.




whether or not secured by mortgage, but not carrying a right to participate in the debtor’s profits,

and in particular income from government securities and income from bonds or debentures,

including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges

for late payment shall not be regarded as interest for the purpose of this Article.

4. The provisions of paragraph 1 shall not apply if the beneficial owner of the interest, being

a resident of a Contracting State, carries on business in the other Contracting State in which the

interest arises, through a permanent establishment situated therein and the debt claim in respect of

which the interest is paid is effectively connected with such permanent establishment. In such

case the provisions of Article 7 shall apply.

5. Interest shall be deemed to arise in a Contracting State when the payer is a resident of

that State. Where, however, the person paying the interest, whether that person is a resident of a

Contracting State or not, has in a Contracting State a permanent establishment in connection with

which the indebtedness on which the interest is paid was incurred, and such interest is borne by

such permanent establishment, then such interest shall be deemed to arise in the State in which

the permanent establishment is situated.


between both of them and some other person, the amount of the interest, having regard to the

debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the

payer and the beneficial owner in the absence of such relationship, the provisions of this Article

shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall

remain taxable according to the laws of each Contracting State, due regard being had to the other

provisions of this Convention.

ARTICLE 12

Royalties

1. Royalties arising in a Contracting State and beneficially owned by a resident of the other

Contracting State shall be taxable only in that other State.




consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work

(including cinematograph films and films, tapes or discs for radio or television broadcasting), any

patent, trade mark, design or model, plan, secret formula or process, or for information

concerning industrial, commercial or scientific experience.

4. The provisions of paragraph 1 shall not apply if the beneficial owner of the royalties,

being a resident of a Contracting State, carries on business in the other Contracting State in which

the royalties arise, through a permanent establishment situated therein and the right or property in

respect of which the royalties are paid is effectively connected with such permanent

establishment. In such case the provisions of Article 7 shall apply.

5. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of

that State. Where, however, the person paying the royalties, whether that person is a resident of a

Contracting State or not, has in a Contracting State a permanent establishment with which the

right or property in respect of which the royalties are paid is effectively connected, and such

royalties are borne by such permanent establishment, then such royalties shall be deemed to arise

in the State in which the permanent establishment is situated.


between both of them and some other person, the amount of the royalties, having regard to the

use, right or information for which they are paid, exceeds the amount which would have been

agreed upon by the payer and the beneficial owner in the absence of such relationship, the

provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess

part of the payments shall remain taxable according to the laws of each Contracting State, due

regard being had to the other provisions of this Convention.

ARTICLE 13

Capital Gains


property referred to in Article 6 and situated in the other Contracting State may be taxed in that

other State.


permanent establishment which an enterprise of a Contracting State has in the other Contracting

State, including such gains from the alienation of such a permanent establishment (alone or with

the whole enterprise), may be taxed in that other State.

3. Gains from the alienation of ships or aircraft operated in international traffic or movable

property pertaining to the operation of such ships or aircraft, shall be taxable only in the

Contracting State in which the place of effective management of the enterprise is situated. For the

purposes of this paragraph the provisions of paragraph 2 of Article 8 shall apply.

4. Gains from the alienation of any property other than that referred to in paragraphs 1, 2

and 3, shall be taxable only in the Contracting State of which the alienator is a resident.

5. Notwithstanding the provisions of paragraph 4, a Contracting State may, in accordance

with its own laws, including the interpretation of the term ―alienation‖, levy tax on gains derived

by an individual who is a resident of the other Contracting State from the alienation of shares in,

―jouissance‖ rights of or debt-claims on a company whose capital is divided into shares and

which, under the laws of the firstmentioned Contracting State, is a resident of that State, and from

the alienation of part of the rights attached to the said shares, ―jouissance‖ shares or debt claims,

if that individual – either alone or with his or her spouse – or one of their relations by blood or

marriage in the direct line directly or indirectly holds at least 5 per cent of the issued capital of a

particular class of shares in that company. This provision shall apply only if the individual who

derives the gains was a resident of the firstmentioned State at any time during the ten years

preceding the year in which the gains are derived and provided that, at the time the individual

became a resident of the other Contracting State, the above-mentioned conditions regarding share

ownership in the said company were satisfied. In cases where, under the domestic laws of the

firstmentioned Contracting State, an assessment has been issued to the individual in respect of the

alienation of the aforesaid shares which is deemed to have taken place at the time of the

individual’s emigration from the firstmentioned Contracting State, the above shall apply only as

long as part of the assessment is still due.

ARTICLE 14

Income from Employment

1. Subject to the provisions of Articles 15, 17, 18 and 19, salaries, wages and other similar

remuneration derived by a resident of a Contracting State in respect of an employment shall be

taxable only in that State unless the employment is exercised in the other Contracting State. If the

employment is so exercised, such remuneration as is derived therefrom may be taxed in that other

State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a

Contracting State in respect of an employment exercised in the other Contracting State shall be

taxable only in the firstmentioned State if:


the aggregate 183 days in any twelve month period commencing or ending in the




(c) the remuneration is not borne by a permanent establishment which the employer

has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration derived by a

resident of a Contracting State in respect of an employment exercised aboard a ship or aircraft

operated in international traffic, shall be taxable only in that State.

ARTICLE 15

Directors’ Fees

Directors’ fees or other remuneration derived by a resident of a Contracting State in that

person’s capacity as a member of the board of directors, a ―bestuurder‖ or a ―commissaris‖ of a

company which is a resident of the other Contracting State may be taxed in that other State.

ARTICLE 16

Entertainers and Sportspersons

1. Notwithstanding the provisions of Articles 7 and 14, income derived by a resident of a

Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or

a musician, or as a sportsperson, from that person’s personal activities as such exercised in the

other Contracting State, may be taxed in that other State.

2. Where income in respect of personal activities exercised by an entertainer or a

sportsperson in that person’s capacity as such accrues not to the entertainer or sportsperson but to

another person, that income may, notwithstanding the provisions of Articles 7 and 14, be taxed in

the Contracting State in which the activities of the entertainer or sportsperson are exercised.

3. Paragraphs 1 and 2 shall not apply to income derived by a resident of a Contracting State

from activities exercised in the other Contracting State if the visit to that other State is supported

wholly or mainly by public funds of the firstmentioned State, a political subdivision or a local

authority thereof, or takes place under a cultural agreement or arrangement between the

Governments of the Contracting States. In such case, the income shall be taxable only in the

Contracting State of which the entertainer or sportsperson is a resident.

ARTICLE 17

Pensions, Annuities and Social Security Payments

1. Pensions and other similar remuneration, and annuities, arising in a Contracting State and

paid to a resident of the other Contracting State, may be taxed in the firstmentioned State.

2. Any pension and other payment paid out under the provisions of a social security system

of a Contracting State to a resident of the other Contracting State may be taxed in the

firstmentioned State.

3. Notwithstanding the preceding paragraphs, pensions, allowances and benefits based on

the Netherlands laws and regulations concerning financial support to victims of the Second World

War and their next of kin, if paid to residents of South Africa, shall be taxable in South Africa.

[Sub-article 3 inserted by article III of GN 32 of 23 January 2009 w.e.f. 28 December 2008.]

4. The term ―annuity‖ means a stated sum payable periodically at stated times during life or

during a specified or ascertainable period of time under an obligation to make the payments in

return for adequate and full consideration in money or money’s worth.

[Sub-article 4, previously sub-article 3, renumbered by article III of GN 32 of 23 January

2009 w.e.f. 28 December 2008.]

5. A pension or other similar remuneration or annuity is deemed to be derived from a

Contracting State if and insofar as the contributions or payments associated with the pension or

similar remuneration or annuity, or the entitlements received from it qualified for tax relief in that

State. The transfer of a pension from a pension fund or an insurance company in a Contracting

State to a pension fund or an insurance company in another State will not restrict in any way the

taxing rights of the firstmentioned State under this Article.

[Sub-article 4, previously sub-article 4, renumbered by article III of GN 32 of 23 January

2009 w.e.f. 28 December 2008.]

ARTICLE 18

Government Service


Contracting State or a political subdivision or a local authority thereof to an individual in respect

of services rendered to that State or subdivision or authority may be taxed in that State.

(b) However, such salaries, wages and other similar remuneration shall be taxable only

in the other Contracting State if the services are rendered in that State and the individual is a

resident of that State who:



services.

2. The provisions of Articles 14, 15 and 17 shall apply to salaries, wages and other similar

remuneration, and to pensions, in respect of services rendered in connection with a business

carried on by a Contracting State or a political subdivision or a local authority thereof.

ARTICLE 19

Professors and Teachers

1. An individual who visits one of the Contracting States for a period not exceeding two

years for the purpose of teaching or engaging in research at a university, college or other

recognised educational institution in that State, and who was immediately before that visit a

resident of the other Contracting State shall be taxable only in that other State on any

remuneration for such teaching or research for a period not exceeding two years from the first

date the individual first visits the firstmentioned State for such purpose.

2. This Article shall not apply to income from research if such research is undertaken not in

the public interest but primarily for the private benefit of a specific person or persons.

ARTICLE 20

Students

Students or business apprentices who are present in a Contracting State solely for the purpose

of their education or training and who are, or immediately before being so present were residents

of the other Contracting State, shall be exempt from tax in the firstmentioned State on payments

received from outside that firstmentioned State for the purpose of their maintenance, education or

training.

ARTICLE 21

Other Income

1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in

the foregoing Articles of this Convention shall be taxable only in that State.

2. The provisions of paragraph 1 shall not apply to income, other than income from

immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being

a resident of a Contracting State, carries on business in the other Contracting State through a

permanent establishment situated therein and the right or property in respect of which the income

is paid is effectively connected with such permanent establishment. In such case the provisions of

Article 7 shall apply.

CHAPTER IV

TAXATION OF CAPITAL

ARTICLE 22

Capital

1. Capital represented by immovable property referred to in Article 6, owned by a resident

of a Contracting State and situated in the other Contracting State, may be taxed in that other State.

2. Capital represented by movable property forming part of the business property of a

permanent establishment which an enterprise of a Contracting State has in the other Contracting

State may be taxed in that other State.

3. Capital represented by ships and aircraft operated in international traffic and by movable

property pertaining to the operation of such ships and aircraft, shall be taxable only in the

Contracting State in which the place of effective management of the enterprise is situated. For the

purposes of this paragraph the provisions of paragraph 2 of Article 8 shall apply.

4. All other elements of capital of a resident of a Contracting State shall be taxable only in

that State.

CHAPTER V

ELIMINATION OF DOUBLE TAXATION

ARTICLE 23

Elimination of Double Taxation

1. The Netherlands, when imposing tax on its residents, may include in the basis upon

which such taxes are imposed the items of income or capital which, according to the provisions of

this Convention, may be taxed in South Africa.

2. However, where a resident of the Netherlands derives items of income or owns items of

capital which according to Article 6, Article 7, paragraph 6 of Article 10, paragraph 4 of Article

11, paragraph 4 of Article 12, paragraphs 1 and 2 of Article 13, paragraph 1 of Article 14,

paragraphs 1 and 2 of Article 17, paragraph 1 (subparagraph a) of Article 18, paragraph 2 of

Article 21 and paragraphs 1 and 2 of Article 22 of this Convention may be taxed in South Africa

and are included in the basis referred to in paragraph 1, the Netherlands shall exempt such items

of income or capital by allowing a reduction of its tax. This reduction shall be computed in

conformity with the provisions of the Netherlands law for the avoidance of double taxation. For

that purpose the said items of income or capital shall be deemed to be included in the total

amount of the items of income or capital which are exempt from Netherlands tax under those

provisions.

[Sub-article 2 amended by article IV of GN 32 of 23 January 2009 w.e.f. 28 December

2008.]

3. Further, the Netherlands shall allow a deduction from the Netherlands tax so computed

for the items of income which according to paragraphs 2 and 9 of Article 10, paragraph 5 of

Article 13, Article 15 and Article 16 of this Convention may be taxed in South Africa to the

extent that these items are included in the basis referred to in paragraph 1. The amount of this

deduction shall be equal to the tax paid in South Africa on these items of income, but shall not

exceed the amount of the deduction which would be allowed if the items of income so included

were the sole items of income which are exempt from Netherlands tax under the provisions of the

Netherlands law for the avoidance of double taxation.


2008.]

4. Notwithstanding the provisions of paragraph 2, the Netherlands shall allow a deduction

from the Netherlands tax for the tax paid in South Africa on items of income which according to

Article 7, paragraph 6 of Article 10, paragraph 4 of Article 11, paragraph 4 of Article 12 and

paragraph 2 of Article 21 of this Convention may be taxed in South Africa to the extent that these

items are included in the basis referred to in paragraph 1, if and insofar as the Netherlands under

the provisions of the Netherlands law for the avoidance of double taxation allows a deduction

from the Netherlands tax of the tax levied in another country on such items of income. For the

computation of this deduction the provisions of paragraph 3 of this Article shall apply

accordingly.


2008.]

5. In South Africa, subject to the provisions of the law of South Africa regarding the

deduction from tax payable in South Africa of tax payable in any country other than South Africa,

Netherlands tax paid by residents of South Africa in respect of income taxable in the Netherlands,

in accordance with the provisions of this Convention, shall be deducted from the taxes due

according to South African fiscal law. Such deduction shall not, however, exceed an amount

which bears to the total South African tax payable the same ratio as the income concerned bears

to the total income.

CHAPTER VI

SPECIAL PROVISIONS

ARTICLE 24

Offshore Activities

1. The provisions of this Article shall apply notwithstanding any other provisions of this

Convention. However, this Article shall not apply where offshore activities of a person constitute

for that person a permanent establishment under the provisions of Article 5.

2. In this Article the term ―offshore activities‖ means activities which are carried on

offshore in connection with the exploration or exploitation of the seabed and its subsoil and their

natural resources, situated in a Contracting State.

3. An enterprise of a Contracting State which carries on offshore activities in the other

Contracting State shall, subject to paragraph 4 of this Article, be deemed to be carrying on, in

respect of those activities, business in that other State through a permanent establishment situated

therein, unless the offshore activities in question are carried on in the other State for a period or

periods not exceeding in the aggregate 30 days in any period of 12 months.

For the purposes of this paragraph:

(a) where an enterprise carrying on offshore activities in the other Contracting State is

associated with another enterprise and that other enterprise continues, as part of

the same project, the same offshore activities that are or were being carried on by

the firstmentioned enterprise, and the aforementioned activities carried on by both

enterprises – when added together – exceed a period of 30 days, then each

enterprise shall be deemed to be carrying on its activities for a period exceeding

30 days in a 12 month period;

(b) an enterprise shall be regarded as associated with another enterprise if one holds

directly or indirectly at least one third of the capital of the other enterprise or if a

person holds directly or indirectly at least one third of the capital of both

enterprises.

4. However, for the purposes of paragraph 3 of this Article the term ―offshore activities‖

shall be deemed not to include:

(a) one or any combination of the activities mentioned in paragraph 4 of Article 5;

(b) towing or anchor handling by ships primarily designed for that purpose and any

other activities performed by such ships;

(c) the transport of supplies or personnel by ships or aircraft in international traffic.

5. A resident of a Contracting State who carries on offshore activities in the other

Contracting State, which consist of professional services or other activities of an independent

character, shall be deemed to be performing those activities from a permanent establishment in

the other Contracting State if the offshore activities in question last for a continuous period of 30

days or more.

6. Salaries, wages and other similar remuneration derived by a resident of a Contracting

State in respect of an employment connected with offshore activities carried on through a

permanent establishment in the other Contracting State may, to the extent that the employment is

exercised offshore in that other State, be taxed in that other State.

7. Where documentary evidence is produced that tax has been paid in South Africa on the

items of income which may be taxed in South Africa according to Article 7 in connection with

respectively paragraph 3 and paragraph 5 of this Article, and to paragraph 6 of this Article, the

Netherlands shall allow a reduction of its tax which shall be computed in conformity with the

rules laid down in paragraph 2 of Article 23.

ARTICLE 25

Non-discrimination

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to

any taxation or any requirement connected therewith, which is other or more burdensome than the

taxation and connected requirements to which nationals of that other State in the same

circumstances, in particular with respect to residence, are or may be subjected. This provision

shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of

one or both of the Contracting States.

2. The taxation on a permanent establishment which an enterprise of a Contracting State has

in the other Contracting State shall not be less favourably levied in that other State than the

taxation levied on enterprises of that other State carrying on the same activities. This provision

shall not be construed as obliging a Contracting State to grant to residents of the other

Contracting State any personal allowances, reliefs and reductions for taxation purposes on

account of civil status or family responsibilities which it grants to its own residents.

3. Except where the provisions of paragraph 1 of Article 9, paragraph 6 of Article 11, or

paragraph 6 of Article 12, apply, interest, royalties and other disbursements paid by an enterprise

of a Contracting State to a resident of the other Contracting State shall, for the purpose of

determining the taxable profits of such enterprise, be deductible under the same conditions as if

they had been paid to a resident of the firstmentioned State. Similarly, any debts of an enterprise

of a Contracting State to a resident of the other Contracting State shall, for the purpose of

determining the taxable capital of such enterprise, be deductible under the same conditions as if

they had been contracted to a resident of the firstmentioned State.


controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not

be subjected in the firstmentioned State to any taxation or any requirement connected therewith

which is other or more burdensome than the taxation and connected requirements to which other

similar enterprises of the firstmentioned State are or may be subjected.

5. Contributions paid by, or on behalf of, an individual who is a resident of a Contracting

State to a pension plan that is recognised for tax purposes in the other Contracting State will be

treated in the same way for tax purposes in the firstmentioned State as a contribution paid to a

pension plan that is recognised for tax purposes in that firstmentioned State, provided that:

(a) such individual was contributing to such pension plan for a period ending

immediately before the individual became a resident of the firstmentioned State;

and

(b) the competent authority of the firstmentioned State agrees that the pension plan

corresponds to a pension plan recognised for tax purposes by that State.

For the purpose of this paragraph, ―pension plan‖ includes a pension plan created under a public

social security system.

6. The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to

taxes of every kind and description.

ARTICLE 26

Mutual Agreement Procedure

1. Where a person considers that the actions of one or both of the Contracting States result

or will result for that person in taxation not in accordance with this Convention, that person may,

irrespective of the remedies provided by the domestic law of those States, present a case to the

competent authority of the Contracting State of which the person is a resident or, if the case

comes under paragraph 1 of Article 25, to that of the Contracting State of which the person is a

national. The case must be presented within three years from the first notification of the action

resulting in taxation not in accordance with the provisions of the Convention.

2. The competent authority shall endeavour, if the objection appears to it to be justified and

if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement


taxation which is not in accordance with the Convention. Any agreement reached shall be

implemented notwithstanding any time limits in the domestic law of the Contracting States.


agreement any difficulties or doubts arising as to the interpretation or application of the

Convention. They may also consult together for the elimination of double taxation in cases not

provided for in the Convention.



5. If any difficulty or doubt arising as to the interpretation or application of the Convention

cannot be resolved by the competent authorities of the Contracting States in a mutual agreement

procedure pursuant to the previous paragraphs of this Article within a period of two years after

the question was raised, the case may, at the request of either Contracting State, be submitted for

arbitration, but only after fully exhausting the procedures available under paragraphs 1 to 4 of this

Article and provided the taxpayer or taxpayers involved agree in writing to be bound by the

decision of the arbitration board. The decision of the arbitration board in a particular case shall be

binding on both Contracting States and the taxpayer or taxpayers involved with respect to that

case. The composition of the arbitration board and the arbitration procedures shall be determined

by the competent authorities of the Contracting States.

ARTICLE 27

Exchange of Information


foreseeably relevant for carrying out the provisions of this Convention or to the administration or

enforcement of the domestic laws concerning taxes of every kind and description imposed on

behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as

the taxation thereunder is not contrary to the Convention. The exchange of information is not

restricted by Articles 1 and 2.

2. Any information received under paragraph 1 by a Contracting State shall be treated as

secret in the same manner as information obtained under the domestic laws of that State and shall

be disclosed only to persons or authorities (including courts and administrative bodies) concerned

with the assessment or collection of, the enforcement or prosecution in respect of, the

determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the

above. Such persons or authorities shall use the information only for such purposes. They may

disclose the information in public court proceedings or in judicial decisions.

3. The Contracting States may release to the arbitration board, established under the

provisions of paragraph 5 of Article 26, such information as is necessary for carrying out the

arbitration procedure. The members of the arbitration board shall be subject to the limitations on

disclosure described in paragraph 2 of this Article with respect to any information so released.

4. In no case shall the provisions of the preceding paragraphs be construed so as to impose

on a Contracting State the obligation:






commercial or professional secret or trade process, or information the disclosure

of which would be contrary to public policy (ordre public).

5. If information is requested by a Contracting State in accordance with this Article, the

other Contracting State shall use its information gathering measures to obtain the requested

information, even though that other State may not need such information for its own tax purposes.

The obligation contained in the preceding sentence is subject to the limitations of paragraph 4 but

in no case shall such limitations be construed to permit a Contracting State to decline to supply

information solely because it has no domestic interest in such information.

6. In no case shall the provisions of paragraph 4 be construed to permit a Contracting State

to decline to supply information solely because the information is held by a bank, other financial

institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to

ownership interests in a person.

[Article 27 substituted by article V of GN 32 of 23 January 2009 w.e.f. 28 December 2008.]

ARTICLE 28

Assistance in the Collection of Taxes


claims. This assistance is not restricted by Articles 1 and 2. The competent authorities of the

Contracting States may by mutual agreement settle the mode of application of this Article.

2. The term ―revenue claim‖ as used in this Article means an amount owed in respect of

taxes of every kind and description imposed on behalf of the Contracting States, or of their

political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to this

Convention or any other instrument to which the Contracting States are parties, as well as

interest, administrative penalties and costs of collection or conservancy related to such amount.

3. The provisions of this Article shall apply only to a revenue claim that forms the subject

of an instrument permitting enforcement in the applicant State and, unless otherwise agreed

between the competent authorities, that is not contested. However, where the claim relates to a

liability to tax of a person that is not a resident of the applicant State, this Article shall only apply,

unless otherwise agreed between the competent authorities, where the claim may no longer be

contested. The revenue claim shall be collected by that other State in accordance with the



4. When a revenue claim of a Contracting State is a claim in respect of which that State

may, under its law, take measures of conservancy with a view to ensure its collection, that


purposes of taking measures of conservancy by the competent authority of the other Contracting

State. That other State shall take measures of conservancy in respect of that revenue claim in

accordance with the provisions of its laws as if the revenue claim were a revenue claim of that

other State even if, at the time when such measures are applied, the revenue claim is not

enforceable in the firstmentioned State or is owed by a person who has a right to prevent its

collection.

5. Notwithstanding the provisions of paragraphs 3 and 4, a revenue claim accepted by a

Contracting State for purposes of paragraph 3 or 4 shall not, in that State, be subject to the time

limits or accorded any priority applicable to a revenue claim under the laws of that State by

reason of its nature as such and, unless otherwise agreed between the competent authorities, shall

not lead to imprisonment of the debtor in respect of the debt. In addition, a revenue claim

accepted by a Contracting State for the purposes of paragraph 3 or 4 shall not, in that State, have

any priority applicable to that revenue claim under the laws of the other Contracting State.



Contracting State.

7. Where, at any time after a request has been made by a Contracting State under paragraph

3 or 4 and before the other Contracting State has collected and remitted the relevant revenue

claim to the firstmentioned State, the relevant revenue claim ceases to be:

(a) in the case of a request under paragraph 3, a revenue claim of the firstmentioned

State that is enforceable under the laws of that State and is owed by a person who,

at that time, cannot, under the laws of that State, prevent its collection, or

(b) in the case of a request under paragraph 4, a revenue claim of the firstmentioned

State in respect of which that State may, under its laws, take measures of

conservancy with a view to ensure its collection, the competent authority of the

firstmentioned State shall promptly notify the competent authority of the other

State of that fact and, at the option of the other State, the firstmentioned State shall

either suspend or withdraw its request.

8. In no case shall the provisions of this Article be construed so as to impose on a

Contracting State the obligation:



(b) to carry out measures which would be contrary to public policy (ordre public);


measures of collection or conservancy, as the case may be, available under its

laws or administrative practice;

(d) to provide assistance in those cases where the administrative burden for that State

is clearly disproportionate to the benefit to be derived by the other Contracting

State.

[Article 28 substituted by article VI of GN 32 of 23 January 2009 w.e.f. 28 December 2008.]

ARTICLE 29

Members of Diplomatic Missions and Consular Posts

1. Nothing in this Convention shall affect the fiscal privileges of members of diplomatic

missions or consular posts under the general rules of international law or under the provisions of

special agreements.

2. For the purposes of the Convention an individual who is a member of a diplomatic

mission or consular post of a Contracting State in the other Contracting State or in a third State

and who is a national of the sending State shall be deemed to be a resident of the sending State if

the individual is liable therein to the same obligations in respect of taxes on income and on capital

as are residents of that State.

3. The Convention shall not apply to international organisations, organs and officials

thereof and members of a diplomatic mission or consular post of a third State, being present in a

Contracting State, if they are not liable therein to the same obligations in respect of taxes on

income or on capital as are residents of that State.

ARTICLE 30

Territorial Extension

1. This Convention may be extended, either in its entirety or with any necessary

modifications, to either or both of the countries of the Netherlands Antilles and Aruba, if the

country concerned imposes taxes substantially similar in character to those to which the

Convention applies. Any such extension shall take effect from such date and be subject to such

modifications and conditions, including conditions as to termination, as may be specified and

agreed in notes to be exchanged through the diplomatic channel.

2. Unless otherwise agreed the termination of the Convention shall not also terminate any

extension of the Convention to any country to which it has been extended under this Article.

CHAPTER VII

FINAL PROVISIONS

ARTICLE 31

Entry into Force

1. This Convention shall enter into force on the thirtieth day after the latter of the dates on

which the respective Governments have notified each other in writing through the diplomatic

channel that the formalities constitutionally required in their respective States have been complied

with, and its provisions shall have effect for taxable years and periods beginning on or after the

first day of January in the calendar year following that in which the Convention has entered into

force.

2. The Convention between the Government of the Kingdom of the Netherlands and the

Government of the Republic of South Africa for the avoidance of double taxation and the

prevention of fiscal evasion with respect to taxes on income, with Protocol, signed at Cape Town

on March 15, 1971, shall be terminated with effect from the date of entry into force of this

Convention and shall cease to have effect for any period thereafter for which the provisions of

this Convention shall apply.

ARTICLE 32

Termination

This Convention shall remain in force until terminated by one of the Contracting States.

Either State may terminate the Convention, through the diplomatic channel, by giving notice of

termination at least six months before the end of any calendar year after the expiration of a period

of five years from the date of its entry into force. In such event the Convention shall cease to have

effect for taxable years and periods beginning after the end of the calendar year in which the

notice of termination has been given.

IN WITNESS WHEREOF the undersigned, duly authorised thereto, have signed this

Convention.

DONE at Pretoria in duplicate, in the English language, this 10th day of October 2005.

TA. Manuel

FOR THE GOVERNMENT OF THE REPUBLIC OF SOUTH AFRICA

Dr B. Bot

FOR THE GOVERNMENT OF THE KINGDOM OF THE NETHERLANDS

PROTOCOL

At the moment of signing the Convention for the avoidance of double taxation and the

prevention of fiscal evasion with respect to taxes on income and on capital, this day concluded

between the Republic of South Africa and the Kingdom of the Netherlands, the undersigned have

agreed that the following provisions shall form an integral part of the Convention.

I. Ad Articles 3 and 26

It is understood that if the competent authorities of the Contracting States, by mutual

agreement, have reached a solution within the context of the Convention, for cases in which

double taxation or double exemption would occur:

(a) as a result of the application of paragraph 2 of Article 3 with respect to the

interpretation of a term not defined in the Convention; or

(b) as a result of differences in qualification (for example of an item of income or of a

person), this solution – after publication thereof by both competent authorities –

shall also be binding in other similar cases in the application of the provisions of

the Convention.

II. Ad Article 4

An individual living aboard a ship without any real domicile in either of the Contracting

States shall be deemed to be a resident of the Contracting State in which the ship has its home

harbour.

III. Ad Articles 5, 6, 7, 13 and 24

It is understood that exploration and exploitation rights of natural resources shall be regarded

as immovable property situated in the Contracting State the seabed and subsoil of which they are

related to, and that these rights shall be deemed to pertain to the property of a permanent

establishment in that State. Furthermore, it is understood that the aforementioned rights include

rights to interests in, or to the benefits of, assets to be produced by such exploration or

exploitation.

IV. Ad Article 7

In respect of paragraphs 1 and 2 of Article 7, where an enterprise of a Contracting State sells

goods or merchandise or carries on business in the other Contracting State through a permanent

establishment situated therein, the profits of that permanent establishment shall not be determined

on the basis of the total amount received by the enterprise, but shall be determined only on the

basis of that portion of the income of the enterprise that is attributable to the actual activity of the

permanent establishment in respect of such sales or business. Specifically, in the case of contracts

for the survey, supply, installation or construction of industrial, commercial or scientific

equipment or premises, or of public works, when the enterprise has a permanent establishment,

the profits attributable to such permanent establishment shall not be determined on the basis of

the total amount of the contract, but shall be determined only on the basis of that part of the

contract that is effectively carried out by the permanent establishment in the Contracting State

where the permanent establishment is situated. The profits related to that part of the contract

which is carried out by the head office of the enterprise shall be taxable only in the Contracting

State of which the enterprise is a resident.

V. Ad Article 7

Payments received as a consideration for technical services, including studies or surveys of a

scientific, geological or technical nature, or for consultancy or supervisory services shall be

deemed to be payments to which the provisions of Article 7 apply.

VI. Ad Article 9

In respect of paragraph 1 of Article 9, it is understood that the fact that associated enterprises

have concluded arrangements, such as cost sharing arrangements or general services agreements,

for or based on the allocation of executive, general administrative, technical and commercial

expenses, research and development expenses and other similar expenses, is not in itself a

condition as meant in that paragraph.

VII. Ad Articles 10, 11 and 12

Where tax has been levied at source in excess of the amount of tax chargeable under the

provisions of Articles 10, 11 or 12, applications for the refund of the excess amount of tax have to

be lodged with the competent authority of the State having levied the tax, within a period of three

years after the expiration of the calendar year in which the tax has been levied.

VIII. Ad Articles 10 and 13

It is understood that income received in connection with the (partial) liquidation of a

company or a purchase of own shares by a company is treated as income from shares and not as

capital gains.

IX. Ad Article 13

It is understood that if the individual referred to in paragraph 5 of Article 13 is subject to tax

on gains in the circumstances envisaged in that paragraph and the shares, ―jouissance‖ rights or

debt-claims were acquired before the individual became a resident of the firstmentioned State,

that firstmentioned State shall consider that portion of the tax determined in accordance with the

following formula to have been paid:

A = X/Y × Z Where:

A = the amount of tax considered as paid;

X = the period of ownership during which the individual was not a resident of the firstmentioned

State;

Y = the total period of ownership;

Z = the tax on the assessment.

This provision will only apply if the gain taxed in the firstmentioned State includes accrual of

value during a period in which the individual was not a resident of that State.

X. Ad Article 15

It is understood that ―bestuurder‖ or ―commissaris‖ of a Netherlands company means persons

who are nominated as such by the general meeting of shareholders or by any other competent

body of such company and are charged with the general management of the company and the

supervision thereof, respectively.

XI. Ad Article 17

Notwithstanding the provisions of Article 17, where a person who is a resident of South

Africa on the date on which the Convention comes into effect, continues after that date to derive a

pension or other similar remuneration or an annuity as meant in paragraph 1 of Article 17, or

continues after that date to derive a pension or other payment paid as meant in paragraph 2 of

Article 17, that income shall be taxable only in South Africa if the total gross amount of that

income paid out in any calendar year does not exceed 10.000 Euro. However, if the total gross

amount of that income arising in the Netherlands and paid out in any calendar year exceeds

10 000 Euro, then it may also be taxed in the Netherlands, but only to the extent that the total

gross amount exceeds 10 000 Euro. In that case the Netherlands may include in the basis upon

which its tax is imposed on that income that part thereof that is taxable only in South Africa and

shall exempt that part by allowing a reduction of its tax in conformity with the provisions of

paragraph 2 of Article 23.

XII. Ad Article 23

It is understood that for the computation of the reduction mentioned in paragraph 2 of Article

23, the items of capital referred to in paragraph 1 of Article 22 shall be taken into account for the

value thereof reduced by the value of the debts secured by mortgage on that capital and the items

of capital referred to in paragraph 2 of Article 22 shall be taken into account for the value thereof

reduced by the value of the debts pertaining to the permanent establishment.

XIII. Ad Article 25

1. It is understood that nothing in this Article shall prevent South Africa from imposing on

the profits attributable to a permanent establishment in South Africa of a company – which is a

resident of the Netherlands – a tax at a rate which does not exceed the rate of normal tax on

companies by more than five percentage points.

2. It is further understood that the provision of paragraph 1 shall only apply as long as

permanent establishments of companies which are not residents of South Africa are not liable to

the secondary tax on companies.

3. It is furthermore understood that the provision of paragraph 1 shall no longer apply if

South Africa were to abolish the secondary tax on companies or if it were to levy this tax on

residents of South Africa at a rate of less than five percentage points.

IN WITNESS WHEREOF the undersigned, duly authorised thereto, have signed this

Protocol.

DONE at Pretoria in duplicate, in the English language, this 10th day of October 2005.

TA. Manuel

FOR THE GOVERNMENT OF THE REPUBLIC OF SOUTH AFRICA

Dr B. Bot

FOR THE GOVERNMENT OF THE KINGDOM OF THE NETHERLANDS

GN 751 of 28 July 2006: Convention between the Government of the Republic of South

Africa and the Government of the Federative Republic of Brazil for the avoidance of double

taxation and the prevention of fiscal evasion with respect to taxes on income

SOUTH AFRICAN REVENUE SERVICE

In terms of section 108 (2) of the Income Tax Act, 1962 (Act No. 58 of 1962), read in


No. 108 of 1996), it is hereby notified that the Agreement for the avoidance of double taxation

and the prevention of fiscal evasion with respect to taxes on income set out in the Schedule to this

Notice has been entered into with the Federative Republic of Brazil and has been approved by

Parliament in terms of section 231 (2) of the Constitution.

It is further notified in terms of paragraph 1 of Article 29 of the Convention, that the date of

entry into force is 24 July 2006.

ARRANGEMENT OF REGULATIONS

Preamble




Article 4 Resident







Article 11 Interest



Article 14 Independent Services




Article 18 Pensions, Annuities and Social Security Payments


Article 20 Teachers and Researchers







Article 27 Members of Diplomatic Missions and Consular Posts

Article 28 General Provisions



Protocol

Preamble.—The Government of the Republic of South Africa and the Government of the

Federative Republic of Brazil, desiring to conclude a Convention for the avoidance of double

taxation and the prevention of fiscal evasion with respect to taxes on income,




States.


1. This Convention shall apply to taxes on income imposed on behalf of a Contracting State.

2. There shall be regarded as taxes on income all taxes imposed on total income, or on

elements of income.

3. The existing taxes to which the Convention shall apply are:

(a) in Brazil:

(i) the federal income tax;

(hereinafter referred to as ―Brazilian tax‖); and

(b) in South Africa:

(i) the normal tax;

(ii) the secondary tax on companies; and

(iii) the withholding tax on royalties;


4. The Convention shall apply also to any identical or substantially similar taxes that are

imposed after the date of signature of the Convention in addition to, or in place of, the

existing taxes. The competent authorities of the Contracting States shall notify each other of

any significant changes that have been made in their taxation laws.



(a) the term ―Brazil‖ means the continental and insular territory of the Federative

Republic of Brazil, including its territorial sea, as defined in accordance with the

United Nations Convention on the Law of the Sea, and the corresponding seabed

and subsoil, as well as any maritime area beyond the territorial sea, including the

seabed and the subsoil, to the extent that Brazil exercises sovereign rights in such

an area with respect to the exploration and exploitation of the natural resources in

accordance with international Law; and

(b) the term ―South Africa‖ means the Republic of South Africa and, when used in a





jurisdiction;

(c) the terms ―a Contracting State‖ and ―the other Contracting State‖ mean Brazil or

South Africa, as the context requires;

(d) the term ―company‖ means any body corporate or any entity that is treated as a


(e) the term ―competent authority‖ means:

(i) in Brazil, the Minister of Finance, the Secretary of Federal Revenue or their

authorised representatives; and

(ii) in South Africa, the Commissioner for the South African Revenue Service or

an authorised representative;

(f) the terms ―enterprise of a Contracting State‖ and ―enterprise of the other



Contracting State;

(g) the term ―international traffic‖ means any transport by a ship or aircraft operated

by an enterprise of a Contracting State, except when such transport is solely

between places in the other Contracting State;

(h) the term ―national‖ means:

(i) any individual possessing the nationality of a Contracting State;

(ii) any legal person, partnership or association deriving its status as such from

the laws in force in a Contracting State; and

(i) the term ―person‖ includes an individual, a company and any other body of

persons that is treated as an entity for tax purposes.

2. As regards the application of the provisions of the Convention at any time by a Contracting

State, any term not defined therein shall, unless the context otherwise requires, have the

meaning that it has at that time under the law of that State for the purposes of the taxes to

which the Convention applies, any meaning under the applicable tax laws of that State

prevailing over a meaning given to the term under other laws of that State.

Article 4 Resident

1. For the purposes of this Convention, the term ―resident of a Contracting State‖ means any


domicile, residence, place of management or any other criterion of a similar nature, and also

includes that State and any political subdivision or local authority thereof.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both

Contracting States, then that individual’s status shall be determined as follows:

(a) the individual shall be deemed to be a resident solely of the State in which a

permanent home is available to the individual; if a permanent home is available to

the individual in both States, the individual shall be deemed to be a resident solely

of the State with which the individual’s personal and economic relations are closer

(centre of vital interests);

(b) if sole residence cannot be determined under the provisions of subparagraph (a),




individual shall be deemed to be a resident solely of the State of which the

individual is a national;




resident of both Contracting States, then it shall be deemed to be a resident solely of the

State in which its place of effective management is situated.






(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop, and


resources.

3. A building site, a construction, assembly or installation project constitutes a permanent

establishment only if it lasts more than six months.










goods or merchandise, or of collecting information, for the enterprise;




activities mentioned in subparagraphs (a) to (e), provided that the overall activity

of the fixed place of business resulting from this combination is of a preparatory

or auxiliary character.

5. Notwithstanding the provisions of paragraphs 1 and 2, where a person – other than an agent

of an independent status to whom paragraph 6 applies – is acting on behalf of an enterprise

and has, and habitually exercises, in a Contracting State an authority to conclude contracts in

the name of the enterprise, that enterprise shall be deemed to have a permanent

establishment in that State in respect of any activities which that person undertakes for the

enterprise, unless the activities of such person are limited to those mentioned in paragraph 4

which, if exercised through a fixed place of business, would not make this fixed place of

business a permanent establishment under the provisions of that paragraph.










1. Income derived by a resident of a Contracting State from immovable property, including

income from agriculture or forestry, situated in the other Contracting State may be taxed in

that other State.







natural resources. Ships and aircraft shall not be regarded as immovable property.

3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or

use in any other form of immovable property.

4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable

property of an enterprise and to income from immovable property used in the performance

of independent services.







2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries

on business in the other Contracting State through a permanent establishment situated

therein, there shall in each Contracting State be attributed to that permanent establishment

the profits which it might be expected to make if it were a distinct and separate enterprise

engaged in the same or similar activities under the same or similar conditions and dealing

wholly independently with the enterprise of which it is a permanent establishment.


expenses which are incurred for the purposes of the permanent establishment, including

executive and general administrative expenses so incurred.




this Convention, then the provisions of those Articles shall not be affected by the provisions

of this Article.





international traffic shall include:

(a) profits from the rental on a bare boat basis of ships or aircraft; and

(b) profits from the use, maintenance or rental of containers (including trailers and

related equipment for the transport of containers) used for the transport of goods

or merchandise, where such rental or such use, maintenance or rental, as the case

may be, is incidental to the operation of ships or aircraft in international traffic.

3. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a

joint business or an international operating agency, but only to so much of the profits so

derived as is attributable to the participation held in the joint operation.


Where—















paying the dividends is a resident and according to the laws of that State, but if the

beneficial owner of the dividends is a resident of the other Contracting State, the tax so

charged shall not exceed:



dividends; or


This paragraph shall not affect the taxation of the company in respect of the profits out of

which the dividends are paid.

3. The term ―dividends‖ as used in this Article means income from shares, ―jouissance‖ shares

or ―jouissance‖ rights, mining shares, founders’ shares, or other rights participating in profits

(not being debt-claims), as well as income from other corporate rights which is subjected to

the same taxation treatment as income from shares by the laws of the Contracting State of

which the company making the distribution is a resident.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the

dividends, being a resident of a Contracting State, carries on business in the other

Contracting State of which the company paying the dividends is a resident through a

permanent establishment situated therein, or performs in that other State independent

services from a fixed base situated therein, and the holding in respect of which the dividends

are paid is effectively connected with such permanent establishment or fixed base. In such

case, the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. Where a resident of a Contracting State has a permanent establishment in the other

Contracting State, that permanent establishment may be subject to a tax withheld at source

in accordance with the law of that other Contracting State. However, the tax so charged shall

not exceed 10 per cent of the gross amount of the profits of that permanent establishment

determined after the payment of the corporate tax related to such profits.


the other Contracting State, that other State may not impose any tax on the dividends paid by

the company, except in so far as such dividends are paid to a resident of that other State or in

so far as the holding in respect of which the dividends are paid is effectively connected with

a permanent establishment or a fixed base situated in that other State, nor subject the

company’s undistributed profits to a tax on undistributed profits, even if the dividends paid

or the undistributed profits consist wholly or partly of profits or income arising in such other

State.


purposes of any person concerned with the creation or assignment of the shares or other

rights in respect of which the dividend is paid to take advantage of this Article by means of

that creation or assignment.

Article 11 Interest


may be taxed in that other State.

2. However, such interest may also be taxed in the Contracting State in which it arises and

according to the laws of that State, but if the beneficial owner of the interest is a resident of

the other Contracting State, the tax so charged shall not exceed 15 per cent of the gross

amount of the interest.




bonds or debentures, including premiums and prizes attaching to such securities, bonds or

debentures as well as other income assimilated to income from money lent by the tax law of

the Contracting State in which the income arises.

4. Notwithstanding the provisions of paragraphs 1 and 2:

(a) interest arising in a Contracting State and derived and beneficially owned by the

Government of the other Contracting State, a political subdivision thereof, the

Central Bank or any agency (including a financial institution) wholly owned by

that Government or a political subdivision thereof shall be exempt from tax in the

first-mentioned State;

(b) subject to the provisions of subparagraph (a), interest from securities, bonds or

debentures issued by the Government of a Contracting State, a political

subdivision thereof or any agency (including a financial institution) wholly owned

by that Government or a political subdivision thereof shall be taxable only in that

State.

5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest,

being a resident of a Contracting State, carries on business in the other Contracting State in

which the interest arises through a permanent establishment situated therein, or performs in

that other State independent services from a fixed base situated therein, and the debt-claim

in respect of which the interest is paid is effectively connected with such permanent

establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the

case may be, shall apply.

6. The tax rate limitation provided for in paragraph 2 shall not apply to interest arising in a

Contracting State and paid to a permanent establishment of an enterprise of the other

Contracting State which is situated in a third State.

7. Interest shall be deemed to arise in a Contracting State when the payer is a resident of that

State. Where, however, the person paying the interest, whether that person is a resident of a

Contracting State or not, has in a Contracting State a permanent establishment or a fixed

base in connection with which the indebtedness on which the interest is paid was incurred,

and such interest is borne by such permanent establishment or fixed base, then such interest

shall be deemed to arise in the State in which the permanent establishment or fixed base is

situated.


between both of them and some other person, the amount of the interest, having regard to

the debt-claim for which it is paid, exceeds the amount which would have been agreed upon

by the payer and the beneficial owner in the absence of such relationship, the provisions of

this Article shall apply only to the last-mentioned amount. In such case, the excess part of

the payments shall remain taxable according to the laws of each Contracting State, due

regard being had to the other provisions of this Convention.


purposes of any person concerned with the creation or assignment of the debt-claim in

respect of which the interest is paid to take advantage of this Article by means of that





2. However, such royalties may also be taxed in the Contracting State in which they arise, and

according to the laws of that State, but if the beneficial owner of the royalties is a resident of

the other Contracting State, the tax so charged shall not exceed:

(a) 15 per cent of the gross amount of the royalties arising from the use of, or the

right to use, trade marks;

(b) 10 per cent of the gross amount of the royalties in all other cases.



work (including cinematograph films and films, tapes or discs for radio or television


for the use of, or the right to use, industrial, commercial, or scientific equipment, or for

information concerning industrial, commercial or scientific experience.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties,

being a resident of a Contracting State, carries on business in the other Contracting State in

which the royalties arise through a permanent establishment situated therein, or performs in

that other State independent services from a fixed base situated therein, and the right or

property in respect of which the royalties are paid is effectively connected with such

permanent establishment or fixed base. In such case, the provisions of Article 7 or Article

14, as the case may be, shall apply.

5. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that

State. Where, however, the person paying the royalties, whether that person is a resident of a

Contracting State or not, has in a Contracting State a permanent establishment or a fixed

base with which the right or property in respect of which the royalties are paid is effectively

connected, and such royalties are borne by such permanent establishment or fixed base, then

such royalties shall be deemed to arise in the State in which the permanent establishment or

fixed base is situated.


between both of them and some other person, the amount of the royalties, having regard to

the use, right or information for which they are paid, exceeds the amount which would have

been agreed upon by the payer and the beneficial owner in the absence of such relationship,

the provisions of this Article shall apply only to the last-mentioned amount. In such case, the

excess part of the payments shall remain taxable according to the laws of each Contracting

State, due regard being had to the other provisions of this Convention.


purposes of any person concerned with the creation or assignment of the rights in respect of

which the royalties are paid to take advantage of this Article by means of that creation or

assignment.



property referred to in Article 6 and situated in the other Contracting State may be taxed in

that other State.



Contracting State or of movable property pertaining to a fixed base available to a resident of

a Contracting State in the other Contracting State for the purpose of performing independent

services, including such gains from the alienation of such a permanent establishment (alone

or with the whole enterprise) or of such fixed base, may be taxed in that other State.

3. Gains of an enterprise of a Contracting State from the alienation of ships or aircraft operated

in international traffic or movable property pertaining to the operation of such ships or

aircraft shall be taxable only in the Contracting State in which the enterprise is subject to tax

in accordance with Article 8.

4. Gains from the alienation of shares of the capital stock of a company the property of which

consists directly or indirectly principally of immovable property situated in a Contracting

State may be taxed in that State.

5. Gains from the alienation of any property other than that referred to in the preceding

paragraphs of this Article and arising in the other Contracting State may be taxed in that

other State.

Article 14 Independent Services

1. Income derived by a person that is a resident of a Contracting State in respect of

professional services or other activities of an independent character shall be taxable only in

that State, unless:

(a) the remuneration for those services or activities is paid by a resident of the other

Contracting State or is borne by a permanent establishment or a fixed base

situated therein. In such case, the income may also be taxed in that other State; or

(b) that person, employees of that person or any other person on behalf of that person

are present, or the services or activities continue, in the other Contracting State for

a period or periods exceeding in the aggregate 183 days in any twelve-month

period commencing or ending in the fiscal year concerned. In such case, only so

much of the income as is derived from the services or activities performed in that

other State may be taxed in that other State; or

(c) the services or activities are performed in the other Contracting State through a

fixed base regularly available to that person in that other State for the purpose of

performing that person’s services or activities. In such case, only so much of the

income as is attributable to that fixed base may be taxed in that other State.

2. The term ―professional services‖ includes especially independent scientific, technical,

literary, artistic, educational or teaching activities as well as the independent activities of

physicians, lawyers, engineers, architects, dentists and accountants.


1. Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar

remuneration derived by a resident of a Contracting State in respect of an employment shall

be taxable only in that State unless the employment is exercised in the other Contracting

State. If the employment is so exercised, such remuneration as is derived therefrom may be

taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a

Contracting State in respect of an employment exercised in the other Contracting State shall

be taxable only in the first-mentioned State if:


the aggregate 183 days in any twelve-month period commencing or ending in the




(c) the remuneration is not borne by a permanent establishment or a fixed base which

the employer has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of

an employment exercised aboard a ship or aircraft operated in international traffic by an

enterprise of a Contracting State may be taxed in that State.


Directors’ fees and similar payments derived by a resident of a Contracting State in that

person’s capacity as a member of the board of directors or of any council of a company which is a

resident of the other Contracting State may be taxed in that other State.


1. Notwithstanding the provisions of Articles 7, 14 and 15, income derived by a resident of a

Contracting State as an entertainer, such as a theatre, motion picture, radio or television

artiste, or a musician, or as a sportsperson, from that person’s personal activities as such

exercised in the other Contracting State, may be taxed in that other State.


in that person’s capacity as such accrues not to the entertainer or sportsperson but to another

person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed

in the Contracting State in which the activities of the entertainer or sportsperson are

exercised.

3. The provisions of paragraphs 1 and 2 shall not apply to income derived from activities

performed in a Contracting State by entertainers or sportspersons if the visit to that State is

wholly or mainly supported by public funds of the other Contracting State or a political

subdivision or a local authority thereof. In such case the income shall be taxable only in the

Contracting State of which the entertainer or sportsperson is a resident.

Article 18 Pensions, Annuities and Social Security Payments

1. Subject to the provisions of paragraph 2 of Article 19, pensions and other similar

remuneration in consideration of past employment, and annuities, arising in a Contracting

State and paid to a resident of the other Contracting State, may be taxed in the first-

mentioned State.

2. Notwithstanding the provisions of paragraph 1, pensions and other payments made under a

public scheme that is part of the social security system of a Contracting State or a political

subdivision or a local authority thereof shall be taxable only in that State.



Contracting State or a political subdivision or a local authority thereof to an

individual in respect of services rendered to that State or subdivision or authority

shall be taxable only in that State.

(b) However, such salaries, wages and other similar remuneration shall be taxable

only in the other Contracting State if the services are rendered in that State and the

individual is a resident of that State who:



services.

2. (a) Any pension paid by, or out of funds created by, a Contracting State or a political

subdivision or a local authority thereof to an individual in respect of services

rendered to that State or subdivision or authority shall be taxable only in that

State.

(b) However, such pension shall be taxable only in the other Contracting State if the

individual is a resident of, and a national of, that State.

3. The provisions of Articles 15, 16, 17 and 18 shall apply to salaries, wages and other similar

remuneration, and to pensions, in respect of services rendered in connection with a business

carried on by a Contracting State or a political subdivision or a local authority thereof.

Article 20 Teachers and Researchers

An individual who is or was immediately before visiting a Contracting State a resident of

the other Contracting State and who, at the invitation of the Government of the first-mentioned

State or of a university, college, school, museum or other cultural institution in that first-

mentioned State, or under an official programme of cultural exchange, is present in that State for

a period not exceeding two consecutive years solely for the purpose of teaching, giving lectures

or carrying out research at such institutions shall be exempt from tax in that State on the

remuneration for such activity, provided that such remuneration is derived from outside that

State.


1. A student or apprentice who is present in a Contracting State solely for the purpose of that

student or apprentice’s education or training and who is, or immediately before being so

present was, a resident of the other Contracting State, shall be exempt from tax in the first-

mentioned State on payments received from outside that first-mentioned State for the

purpose of that student or apprentice’s education or training.

2. In respect of grants, scholarships and remuneration from employment not covered by

paragraph 1, a student or apprentice described in paragraph 1 shall, in addition, be entitled

during such education or training to the same exemptions, reliefs or reductions in respect of

taxes available to residents of the State visited.



foregoing Articles of this Convention, shall be taxable only in that State.

2. The provisions of paragraph 1 shall not apply to income, other than income from immovable

property as defined in paragraph 2 of Article 6, if the recipient of such income, being a

resident of a Contracting State, carries on business in the other Contracting State through a

permanent establishment situated therein, or performs in that other Contracting State

independent services from a fixed base situated therein, and the right or property in respect

of which the income is paid is effectively connected with such permanent establishment or

fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall

apply.


Contracting State not dealt with in the foregoing Articles of the Convention and arising in

the other Contracting State may also be taxed in that other State.


1. Double taxation shall be eliminated as follows:

(a) where a resident of Brazil derives income which, in accordance with the

provisions of this Convention, may be taxed in South Africa, Brazil shall allow, in

accordance with the provisions of its law regarding the elimination of double

taxation, as a deduction from the tax on the income of that resident, an amount

equal to the tax on income paid in South Africa. Such deduction shall not,

however, exceed that part of the income tax, as computed before the deduction is

given, which is attributable to the income which may be taxed in South Africa;

(b) in South Africa, subject to the provisions of the law of South Africa regarding the

deduction from tax payable in South Africa of tax payable in any country other

than South Africa, Brazilian tax paid by residents of South Africa in respect of

income taxable in Brazil, in accordance with the provisions of this Convention,

shall be deducted from the taxes due according to South African fiscal law. Such

deduction shall not, however, exceed an amount which bears to the total South

African tax payable the same ratio as the income concerned bears to the total

income.

2. Where in accordance with any provision of this Convention income derived by a resident of

a Contracting State is exempt from tax in that State, such State may nevertheless, in

calculating the amount of tax on the remaining income of such resident, take into account

the exempted income.



taxation or any requirement connected therewith, which is other or more burdensome than


circumstances, in particular with respect to residence, are or may be subjected.



taxation levied on enterprises of that other State carrying on the same activities. This

provision shall not be construed as obliging a Contracting State to grant to residents of the

other Contracting State any personal allowances, reliefs and reductions for taxation purposes

on account of civil status or family responsibilities which it grants to its own residents.

3. Except where the provisions of Article 9, paragraph 8 of Article 11, or paragraph 6 of

Article 12, apply, interest, royalties and other disbursements paid by an enterprise of a

Contracting State to a resident of the other Contracting State shall, for the purpose of

determining the taxable profits of such enterprise, be deductible under the same conditions

as if they had been paid to a resident of the first-mentioned State.



shall not be subjected in the first-mentioned State to any taxation or any requirements


requirements to which other similar enterprises of the first-mentioned State are or may be

subjected.

5. The provisions of this Article shall apply only to the taxes covered by this Convention.


1. Where a person considers that the actions of one or both of the Contracting States result or

will result for that person in taxation not in accordance with the provisions of this

Convention, that person may, irrespective of the remedies provided by the domestic law of

those States, present a case to the competent authority of the Contracting State of which the

person is a resident. The case must be presented within the time limits provided for in the

domestic law of the Contracting State.


is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement


taxation which is not in accordance with the Convention.


agreement any difficulties or doubts arising as to the interpretation or application of the

Convention.





necessary for carrying out the provisions of this Convention or of the domestic laws

concerning taxes of every kind and description imposed on behalf of the Contracting States,

in so far as the taxation thereunder is not contrary to the Convention. The exchange of

information is not restricted by Articles 1 and 2. Any information received by a Contracting

State shall be treated as secret in the same manner as information obtained under the

domestic laws of that State and shall be disclosed only to persons or authorities (including

courts and administrative bodies) concerned with the assessment or collection of, the

enforcement or prosecution in respect of, or the determination of appeals in relation to the

taxes referred to in the first sentence. Such persons or authorities shall use the information

only for such purposes.

2. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting

State the obligation:






commercial or professional secret or trade process, or information, the disclosure

of which would be contrary to public policy (ordre public).

Article 27 Members of Diplomatic Missions and Consular Posts

Nothing in this Convention shall affect the fiscal privileges of members of diplomatic


special agreements.

Article 28 General Provisions

1. If after the date of signature hereof a Contracting State introduces legislation in terms of

which offshore income derived by a company from:

(a) shipping;

(b) banking, financing, insurance, investment or similar activities; or

(c) being the headquarters, co-ordination centre or similar entity providing

administrative services or other support to a group of companies which carry on

business primarily in other States, is not taxed in that State or is taxed at a rate of

tax which is significantly lower than the rate of tax which is applied to income

from similar onshore activities, the other Contracting State shall not be obliged to

apply any limitation imposed under this Convention on its right to tax the income

derived by the company from such offshore activities or on its right to tax the

dividends paid by the company.

2. A legal entity that is a resident of a Contracting State and derives income from sources

within the other Contracting State shall not be entitled in that other Contracting State to the

benefits of this Convention if more than fifty per cent of the beneficial interest in such an

entity (or in the case of a company, more than fifty per cent of the aggregate vote and value

of the company's shares) is owned, directly or indirectly, by any combination of one or more

persons that are not residents of the first-mentioned Contracting State. However, this

provision shall not apply if that entity carries on in the Contracting State of which it is a

resident substantive business activity other than the mere holding of securities or any other

assets, or the mere performance of auxiliary, preparatory or any other similar activities in

respect of other related entities.

3. Irrespective of the participation of the Contracting States in the General Agreement on Trade

in Services, or in any other international agreements, the tax issues with regard to the taxes

covered by this Convention arising between the Contracting States shall be governed only

by the provisions of this Convention.


1. Each of the Contracting States shall notify to the other the completion of the procedures

required by its law for the bringing into force of this Convention. The Convention shall enter

into force on the date of receipt of the later of these notifications.

2. The provisions of the Convention shall apply:

(a) with regard to taxes withheld at source, in respect of amounts paid, remitted or

credited on or after the first day of January next following the date upon which the

Convention enters into force; and

(b) with regard to other taxes, in respect of income arising in the taxable years

beginning on or after the first day of January next following the date upon which

the Convention enters into force.

3. The Agreement between Brazil and South Africa for the avoidance of double taxation on

profits derived from shipping and air transport entered into through exchange of letters that

took place in Brasilia on March 29, 1972, shall terminate and cease to be effective from the

date upon which this Convention applies in respect of the taxes to which it applies in

accordance with the provisions of paragraphs 1 and 2.


1. This Convention shall remain in force indefinitely but either of the Contracting States may

terminate the Convention through the diplomatic channel, by giving to the other Contracting

State written notice of termination not later than 30 June of any calendar year starting five

years after the year in which the Convention entered into force.

2. In such event the Convention shall cease to apply:

(a) with regard to taxes withheld at source, in respect of amounts paid, remitted or

credited after the end of the calendar year in which such notice is given; and

(b) with regard to other taxes, in respect of income arising in the taxable years

beginning after the end of the calendar year in which such notice is given.

IN WITNESS WHEREOF the undersigned, being duly authorised thereto by their respective

Governments, have signed and sealed this Convention.

DONE at Pretoria, this 8th day of November 2003, in duplicate, in the English and in the

Portuguese languages, both texts being equally authentic.

T A Manuel (Signed)




FEDERATIVE REPUBLIC OF

BRAZIL

Protocol

At the moment of the signature of the Convention between the Republic of South Africa and

the Federative Republic of Brazil for the avoidance of double taxation and the prevention of fiscal

evasion with respect to taxes on income, the undersigned, duly authorised thereto, have agreed

upon the following provisions which constitute an integral part of the Convention.

1. With reference to Article 7

It is understood that the provisions of paragraph 3 of Article 7 shall apply to expenses

incurred in the Contracting State in which the permanent establishment is situated or

elsewhere.


It is understood that interest paid as ―remuneration on the company’s equity‖ (―remuneração

sobre o capital próprio‖) in accordance with Brazilian tax law is also considered interest for

the purposes of paragraph 3 of Article 11 in so far as that interest is deductible in

determining the income of the legal person.


It is understood that the provisions of paragraph 3 of Article 12 shall apply to payments of

any kind received as a consideration for the rendering of technical services and technical

assistance.


If, in a convention for the avoidance of double taxation that may subsequently be concluded

between Brazil and a third State not located in Latin America, gains from the alienation of

any property referred to in paragraph 5 of Article 13 are taxable only in the Contracting

State of which the alienator is a resident, similar treatment shall automatically apply in

respect of this Convention.


It is understood that the word ―council‖ mentioned in Article 16 refers to the administrative

and fiscal councils established under Chapter XII, Section I, and Chapter XIII, respectively,

of the Brazilian Corporate Law (Law N. 6.404/76, as amended).


(a) It is understood that with regard to Article 24, reasonable additional requirements,

other than the payment of taxes, shall not constitute discrimination as envisaged in

paragraphs 1 and 4.

(b) It is understood that the provisions of paragraph 5 of Article 10 are not in conflict

with the provisions of paragraph 2 of Article 24.

(c) It is understood that the provisions of Brazilian tax law that do not allow that

royalties as defined in paragraph 3 of Article 12, paid by a permanent

establishment situated in Brazil to a resident of South Africa that carries on

business in Brazil through that permanent establishment, be deductible at the

moment of the determination of the taxable income of that permanent

establishment, are not in conflict with the provisions of paragraph 3 of Article 24.

(d) It is understood that as branches in South Africa of companies which have their

place of effective management outside South Africa are exempt from the

secondary tax on companies, nothing contained in this Article shall prevent South

Africa from imposing on the profits attributable to a permanent establishment in

South Africa of a company, which is a resident of Brazil, a tax at a rate which

does not exceed the rate of normal tax on companies by more than five percentage

points.

(e) It is further understood that should South Africa abolish the secondary tax on

companies without replacing it with a similar tax, the provisions of subparagraph

(d) shall cease to have effect from the date on which the secondary tax on

companies is abolished.

(f) It is understood that the provisions of Article 24 do not prevent a Contracting

State from applying the provisions of its domestic law regarding controlled

foreign corporations or ―thin capitalization‖.

IN WITNESS WHEREOF the undersigned, being duly authorised thereto by their respective

Governments, have signed and sealed this Convention.

DONE at Pretoria, this 8th day of November 2003, in duplicate, in the English and in the

Portuguese languages, both texts being equally authentic.

T A Manuel (Signed)




FEDERATIVE REPUBLIC OF

BRAZIL

GN 471 of 17 June 2015: Agreement between the Government of the Republic of South

Africa and the Government of the Republic of Mauritius for the avoidance of double

taxation and the prevention of fiscal evasion with respect to taxes on income

(Government Gazette No. 38862)

SOUTH AFRICAN REVENUE SERVICE

In terms of section 108 (2) of the Income Tax Act, 1962 (Act No. 58 of 1962), read in


No. 108 of 1996), it is hereby notified that the Agreement for the avoidance of double taxation

and the prevention of fiscal evasion with respect to taxes on income set out in the Schedule to this

Notice has been entered into with the Government of the Republic of Mauritius and has been

approved by Parliament in terms of section 231 (2) of the Constitution.

It is further notified in terms of paragraph 1 of Article 28 of the Agreement, that the date of entry

into force is 28 May 2015.

AGREEMENT BETWEEN THE GOVERNMENT OF THE REPUBLIC OF SOUTH

AFRICA AND THE GOVERNMENT OF THE REPUBLIC OF MAURITIUS FOR THE

AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL

EVASION WITH RESPECT TO TAXES ON INCOME

PREAMBLE

The Government of the Republic of South Africa and the Government of the Republic of

Mauritius;

DESIRING to conclude an Agreement for the avoidance of double taxation and the

prevention of fiscal evasion with respect to taxes on income;

HAVE AGREED AS FOLLOWS:

ARTICLE 1

PERSONS COVERED

This Agreement shall apply to persons who are residents of one or both of the Contracting

States.

ARTICLE 2

TAXES COVERED

1. This Agreement shall apply to taxes on income imposed on behalf of a Contracting State or

its political subdivisions, irrespective of the manner in which they are levied.

2. There shall be regarded as taxes on income all taxes imposed on total income or on elements

of income, including taxes on gains from the alienation of movable or immovable property.

3. The existing taxes to which this Agreement shall apply are:

(a) in Mauritius, the income tax:

(hereinafter referred to as ―Mauritius tax‖); and

(b) in South Africa—

(i) the normal tax;

(ii) the secondary tax on companies;

(iii) the withholding tax on royalties; and

(iv) the tax on foreign entertainers and sportspersons;


4. The Agreement shall apply also to any identical or substantially similar taxes that are

imposed after the date of signature of the Agreement in addition to, or in place of, the

existing taxes. The competent authorities of the Contracting States shall notify each other of

any significant changes that have been made in their taxation laws.

ARTICLE 3

GENERAL DEFINITIONS

1. In this Agreement, unless the context otherwise requires—

(a) the term ―Mauritius‖ means the Republic of Mauritius and includes—

(i) all the territories and islands which, in accordance with the laws of Mauritius,

constitute the State of Mauritius;

(ii) the territorial sea of Mauritius; and

(iii) any area outside the territorial sea of Mauritius which in accordance with

international law has been or may hereafter be designated, under the laws of

Mauritius, as an area, including the Continental Shelf, within which the rights of

Mauritius with respect to the sea, the sea bed and sub-soil and their natural

resources may be exercised;

(b) the term ―South Africa‖ means the Republic of South Africa and, when used in a

geographical sense, includes the territorial sea thereof as well as any area outside the

territorial sea, including the continental shelf, which has been or may hereafter be

designated, under the laws of South Africa and in accordance with international law, as

an area within which South Africa may exercise sovereign rights or jurisdiction;

(c) the terms ―a Contracting State‖ and ―the other Contracting State‖ mean Mauritius or

South Africa as the context requires;



(e) the term ―company‖ means any body corporate or any entity which is treated as a

company or body corporate for tax purposes;

(f) the term ―competent authority‖ means—

(i) in Mauritius, the Director General of the Mauritius Revenue Authority or an

authorised representative of the Director General; and

(ii) in South Africa, the Commissioner for the South African Revenue Service or an

authorised representative of the Commissioner;


(h) the terms ―enterprise of a Contracting State‖ and ―enterprise of the other Contracting

State‖ mean respectively an enterprise carried on by a resident of a Contracting State

and an enterprise carried on by a resident of the other Contracting State;

(i) the term ―international traffic‖ means any transport by a ship or aircraft operated by an

enterprise of a Contracting State, except when the ship or aircraft is operated solely

between places in the other Contracting State;

(j) the term ―national‖, in relation to a Contracting State, means—

(i) any individual possessing the nationality or citizenship of that Contracting State;

and

(ii) any legal person or association deriving its status as such from the laws in force in

that Contracting State;

(k) the term ―person‖ includes an individual, a company and any other body of persons

which is treated as an entity for tax purposes; and

(l) the term ―tax‖ means Mauritius tax or South African tax, as the context requires.

2. As regards the application of the Agreement at any time by a Contracting State, any term not

defined therein shall, unless the context otherwise requires, have the meaning that it has at

that time under the law of that State for the purposes of the taxes to which the Agreement

applies, any meaning under the applicable tax laws of that State prevailing over a meaning

given to the term under other laws of that State.

ARTICLE 4

RESIDENT

1. For the purposes of this Agreement, the term ―resident of a Contracting State‖ means any


domicile, residence, place of management or any other criterion of a similar nature, and also

includes that State and any political subdivision or local authority thereof. This term,

however, does not include any person who is liable to tax in that State in respect only of

income from sources in that State.

2. Where by reason of the provisions of paragraph 1 of this Article an individual is a resident

of both Contracting States, then that individual’s status shall be determined as follows—

(a) the individual shall be deemed to be a resident of the State in which a permanent home

is available to the individual, if a permanent home is available to the individual in both

States, the individual shall be deemed to be a resident only of the State with which the

individual’s personal and economic relations are closer (centre of vital interests);

(b) if the State in which the centre of vital interests is situated cannot be determined, or if

the individual does not have a permanent home available to that person in either State

the individual, shall be deemed to be a resident of the State in which the individual has

an habitual abode;


individual shall be deemed to be a resident of the State of which the individual is a

national;

(Editorial Note: Wording as per original Government Gazette. It is suggested that the phrase ―an

habitual abode‖ is intended to be ―a habitual abode‖.)




resident of both Contracting States, the competent authorities of the Contracting States shall

by mutual agreement endeavour to settle the question and determine the mode of application

of the Agreement to such person. In the absence of such agreement such person shall be

considered to be outside the scope of the Agreement except for the provisions of Article 25.

ARTICLE 5

PERMANENT ESTABLISHMENT

1. For the purposes of this Agreement, the term ―permanent establishment‖ means a fixed

place of business through which the business of the enterprise is wholly or partly carried on.

2. The term ―permanent establishment‖ shall include—


(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a warehouse, in relation to a person providing storage facilities for others;

(g) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

and

(h) an installation or structure used for the exploration of natural resources.

3. The term ―permanent establishment‖ likewise encompasses—

(a) a building site or a construction, installation or assembly project, or supervisory

activities in connection therewith, but only if the site, project or activity lasts more than

twelve months;

(b) the furnishing of services by an enterprise through employees or other personnel

engaged by an enterprise for such purpose, but only where activities of that nature

continue (for the same or a connected project) within the Contracting State for a period

or periods exceeding in the aggregate 183 days in any twelve-month period

commencing or ending in the fiscal year concerned;

(c) the performance of professional services or other activities of an independent character

by an individual, but only where those services or activities continue within a

Contracting State for a period or periods exceeding in the aggregate 183 days in any

twelve-month period commencing or ending in the fiscal year concerned.


establishment‖ shall be deemed not to include—

(a) the use of facilities solely for the purpose of storage, display or delivery of goods or

merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely

for the purpose of storage, display or delivery;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely

for the purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods

or merchandise, or for collecting information, for the enterprise;

(e) the maintenance of a fixed place of business solely for the purpose of advertising, for

the supply of information, for scientific research or for similar activities which have a

preparatory or auxiliary character, for the enterprise; and

(f) the maintenance of a fixed place of business solely for any combination of activities

mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed

place of business resulting from this combination is of a preparatory or auxiliary

character.

5. Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent

of an independent status to whom paragraph 6 applies - is acting on behalf of an enterprise

and has, and habitually exercises, in a Contracting State an authority to conclude contracts in

the name of the enterprise, that enterprise shall be deemed to have a permanent

establishment in that State in respect of any activities which that person undertakes for the

enterprise, unless the activities of such person are limited to those mentioned in paragraph 4

which, if exercised through a fixed place of business, would not make this fixed place of

business a permanent establishment under the provisions of that paragraph.









ARTICLE 6

INCOME FROM IMMOVABLE PROPERTY

1. Income derived by a resident of a Contracting State from immovable property, including

income from agriculture or forestry, is taxable in the Contracting State in which such

property is situated.







natural resources. Ships, boats and aircraft shall not be regarded as immovable property.

3. The provisions of paragraph 1 of this Article shall apply to income derived from the direct

use, letting or use in any other form of immovable property.

4. The provisions of paragraphs 1 and 3 of this Article shall also apply to the income from

immovable property of an enterprise.

ARTICLE 7

BUSINESS PROFITS






2. Subject to the provisions of paragraph 3 of this Article, where an enterprise of a Contracting

State carries on business in the other Contracting State through a permanent establishment

situated therein, there shall in each Contracting State be attributed to that permanent

establishment the profits which it might be expected to make if it were a distinct and

separate enterprise engaged in the same or similar activities under the same or similar

conditions and dealing wholly independently with the enterprise of which it is a permanent

establishment.


expenses which are incurred for the purposes of the permanent establishment including

executive and general administrative expenses so incurred, whether in the Contracting State

in which the permanent establishment is situated or elsewhere. However, no such deduction

shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement

of actual expenses) by the permanent establishment to the head office of the enterprise or

any of its other offices, by way of royalties, fees or other similar payments in return for the

use of patents or other rights, or by way of commission, for specific services performed or

for management, or, except in the case of a banking enterprise, by way of interest on moneys

lent to the permanent establishment. Likewise, no account shall be taken, in determining the

profits of a permanent establishment, of amounts charged (otherwise than towards

reimbursement of actual expenses), by the permanent establishment to the head office of the

enterprise or any of its other offices, by way of royalties, fees or other similar payments in

return for the use of patents or other rights, or by way of commission for specific services

performed or for management, or, except in the case of a banking enterprise, by way of

interest on moneys lent to the head office of the enterprise or any of its other offices.

4. In so far as it has been customary in a Contracting State to determine the profits to be

attributed to a permanent establishment on the basis of an apportionment of the total profits

of the enterprise to its various parts, nothing in paragraph 2 of this Article shall preclude that

Contracting State from determining the profits to be taxed by such an apportionment as may

be customary. The method of apportionment adopted shall, however, be such that the result

shall be in accordance with the principles contained in this Article.



6. For the purposes of the preceding paragraphs of this Article, the profits to be attributed to

the permanent establishment shall be determined by the same method year by year unless

there is good and sufficient reason to the contrary.


this Agreement, then the provisions of those Articles shall not be affected by the provisions

of this Article.

ARTICLE 8

SHIPPING AND AIR TRANSPORT




international traffic shall include—

(a) profits from the rental on a bareboat basis of ships or aircraft; and

(b) profits from the use or rental of containers (including trailers and related equipment for

the transport of containers), used for the transport of goods or merchandise;

where such rental or use is incidental to the operation of ships or aircraft in international

traffic.

3. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a

joint business or an international operating agency.

ARTICLE 9

ASSOCIATED ENTERPRISES

1. Where—


management, control or capital of an enterprise of the other Contracting State; or

(b) the same persons participate directly or indirectly in the management, control or capital

of an enterprise of a Contracting State and an enterprise of the other Contracting State,

and in either case conditions are made or imposed between the two enterprises in their

commercial or financial relations which differ from those which would be made between

independent enterprises, then any profits which would, but for those conditions, have

accrued to one of the enterprises, but, by reason of those conditions, have not so accrued,

may be included in the profits of that enterprise and taxed accordingly.

2. Where a Contracting State includes in the profits of an enterprise of that State – and taxes

accordingly – profits on which an enterprise of the other Contracting State has been charged

to tax in that other State and the profits so included are profits which would have accrued to

the enterprise of the first-mentioned State if the conditions made between the two enterprises

had been those which would have been made between independent enterprises, then that

other State shall make an appropriate adjustment to the amount of the tax charged therein on

those profits. In determining such adjustment, due regard shall be had to the other provisions

of this Agreement and the competent authorities of the Contracting States shall if necessary

consult each other.

ARTICLE 10

DIVIDENDS




paying the dividends is a resident and according to the laws of that State, but if the recipient

is the beneficial owner of the dividends, the tax so charged to the beneficial owner shall not

exceed:

(a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company

which holds at least 10 per cent of the capital of the company paying the dividends;


The competent authorities of the Contracting States shall by mutual agreement settle the

mode of application of these limitations.

This paragraph shall not affect the taxation of the company in respect of the profits out of

which the dividends are paid.

3. The term ―dividends‖ as used in this Article means income from shares or other rights (not

being debt-claims) participating in profits, as well as income from other corporate rights

which is subjected to the same taxation treatment as income from shares by the laws of the

Contracting State of which the company making the distribution is a resident.


the dividends, being a resident of a Contracting State, carries on business in the other

Contracting State of which the company paying the dividends is a resident, through a

permanent establishment situated therein and the holding in respect of which the dividends

are paid is effectively connected with such permanent establishment. In such case, the

provisions of Article 7 shall apply.


the other Contracting State, no tax may be imposed on the beneficial owner in that other

State on the dividends paid by the company except in so far as such dividends are paid to a

resident of that other State or in so far as the holding in respect of which the dividends are

paid is effectively connected with a permanent establishment situated in that other State, nor

subject the company’s undistributed profits to a tax on undistributed profits, even if the

dividends paid or the undistributed profits consist wholly or partly of profits or income

arising in such other State.

ARTICLE 11

INTEREST



2. However, such interest may also be taxed in the Contracting State in which it arises and

according to the laws of that State, but if the beneficial owner of the interest is a resident of


amount of the interest.


mode of application of this limitation.

3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall

be exempt from tax in that State if—

(a) the payer of the interest is the Government of that Contracting State or a political

subdivision or a local authority thereof; or

(b) the interest is paid to the Government of the other Contracting State or a political

subdivision or a local authority thereof; or

(c) the interest is paid by the Central Bank of that Contracting State or to the Central Bank

of the other Contracting State; or

(d) the interest is paid to any institution or body which is wholly owned, directly or

indirectly, by the other Contracting State or a political subdivision or a local authority

thereof; or

(e) the interest arises in respect of any debt instrument listed on a recognised stock

exchange.

4. For the purposes of paragraph 3 (e), the term ―recognised stock exchange‖ means—

(a) in Mauritius, the Stock Exchange of Mauritius;

(b) in South Africa, the Johannesburg Stock Exchange;

(c) any other stock exchange agreed upon by the competent authorities of the Contracting

States.




bonds or debentures, including premiums and prizes attaching to such securities, bonds or

debentures. Penalty charges for late payment shall not be regarded as interest for the

purposes of this Article. The term ―interest‖ shall not include any item which is treated as a

dividend under the provisions of Article 10 of this Agreement.

6. The provisions of paragraphs 1, 2 and 3 of this Article shall not apply if the beneficial owner

of the interest, being a resident of a Contracting State, carries on business in the other

Contracting State in which the interest arises, through a permanent establishment situated

therein, and the debt-claim in respect of which the interest is paid is effectively connected

with such permanent establishment. In such case, the provisions of Article 7 shall apply.

7. Interest shall be deemed to arise in a Contracting State when the payer is a resident of that

State. Where, however, the person paying the interest, whether that person is a resident of a

Contracting State or not, has in a Contracting State a permanent establishment with which

the debt-claim in respect of which the interest is paid is effectively connected, and such

interest is borne by such permanent establishment, then such interest shall be deemed to

arise in the State in which the permanent establishment is situated.


between both of them and some other person, the amount of the interest, having regard to

the debt-claim for which it is paid, exceeds the amount which would have been agreed upon

by the payer and the beneficial owner in the absence of such relationship, the provisions of

this Article shall apply only to the last-mentioned amount. In such a case, the excess part of

the payments shall remain taxable according to the laws of each Contracting State, due

regard being had to the other provisions of this Agreement.

ARTICLE 12

ROYALTIES



2. However, such royalties may also be taxed in the Contracting State in which they arise, and

according to the laws of that State, but if the beneficial owner of the royalties is a resident of


amount of the royalties.


mode of application of this limitation.



work (including cinematograph films and films, tapes or discs for radio or television


for the use of, or the right to use, information concerning industrial, commercial or scientific

experience.


the royalties, being a resident of a Contracting State, carries on business in the other

Contracting State in which the royalties arise through a permanent establishment situated

therein and the right or property in respect of which the royalties are paid is effectively

connected with such permanent establishment. In such case, the provisions of Article 7 shall

apply.

5. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that

State. Where, however, the person paying the royalties, whether that person is a resident of a

Contracting State or not, has in a Contracting State a permanent establishment with which

the right or property in respect of which the royalties are paid is effectively connected, and

such royalties are borne by such permanent establishment, then such royalties shall be

deemed to arise in the State in which the permanent establishment is situated.


between both of them and some other person, the amount of the royalties paid, having regard

to the use, right or information for which they are paid, exceeds the amount which would

have been agreed upon by the payer and the beneficial owner in the absence of such

relationship, the provisions of this Article shall apply only to the last-mentioned amount. In

such a case, the excess part of the payments shall remain taxable according to the laws of

each Contracting State, due regard being had to the other provisions of this Agreement.

ARTICLE 13

CAPITAL GAINS


property referred to in Article 6 and situated in the other Contracting State may be taxed in

that other State.



Contracting State, including such gains from the alienation of such a permanent

establishment (alone or with the whole enterprise), may be taxed in that other State.

3. Gains of an enterprise of a Contracting State from the alienation of ships or aircraft operated

in international traffic, or movable property pertaining to the operation of such ships or

aircraft, shall be taxable only in that State.

4. Gains derived by a resident of a Contracting State from the alienation of shares deriving

more than 50 per cent of their value directly or indirectly from immovable property situated

in the other Contracting State may be taxed in that other State.

5. Gains from the alienation of any property other than that referred to in the preceding

paragraphs of this Article shall be taxable only in the Contracting State of which the

alienator is a resident.

ARTICLE 14

INCOME FROM EMPLOYMENT

1. Subject to the provisions of Articles 15, 17, 18 and 20, salaries, wages and other similar

remuneration derived by a resident of a Contracting State in respect of an employment shall

be taxable only in that State unless the employment is exercised in the other Contracting

State. If the employment is so exercised, such remuneration as is derived therefrom may be

taxed in that other State.

2. Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a

resident of a Contracting State in respect of an employment exercised in the other

Contracting State shall be taxable only in the first-mentioned State if—

(a) the recipient is present in the other State for a period or periods not exceeding in the

aggregate 183 days in the calendar year concerned; and

(b) the remuneration is paid by or on behalf of an employer who is not a resident of the

other State; and

(c) the remuneration is not borne by a permanent establishment which the employer has in

the other State.

3. Notwithstanding the preceding paragraphs of this Article, remuneration derived in respect of

an employment exercised aboard a ship or aircraft operated in international traffic by an

enterprise of a Contracting State may be taxed in that State.

ARTICLE 15

DIRECTORS’ FEES

Directors’ fees and other similar payments derived by a resident of a Contracting State in that

person’s capacity as a member of the board of directors of a company which is a resident of the


ARTICLE 16

ENTERTAINERS AND SPORTSPERSONS

1. Notwithstanding the provisions of Articles 7 and 14, income derived by entertainers such as

theatre, motion picture, radio or television artistes, and musicians, or by sportspersons, from

their personal activities as such, may be taxed in the Contracting State in which these

activities are exercised.


in that person’s capacity as such accrues not to that entertainer or sportsperson but to another

person, that income may, notwithstanding the provisions of Articles 7 and 14, be taxed in

the Contracting State in which the activities of the entertainer or sportsperson are exercised.

3. Income derived by a resident of a Contracting State from activities exercised in the other

Contracting State as envisaged in paragraphs 1 and 2 of this Article, shall be exempt from

tax in that other State if the visit to that other State is supported wholly or mainly by public

funds of the first-mentioned Contracting State, a political subdivision or a local authority

thereof, or takes place under a cultural agreement or arrangement between the Governments

of the Contracting States.

ARTICLE 17

PENSIONS AND ANNUITIES

1. Subject to the provisions of paragraph 2 of Article 18, pensions and other similar

remuneration, and annuities, arising in a Contracting State and paid to a resident of the other

Contracting State, may be taxed in the first-mentioned State.

2. The term ―annuity‖ as used in this Article means a stated sum payable periodically at stated

times, during life or during a specified or ascertainable period of time, under an obligation to

make the payments in return for adequate and full consideration in money or money’s worth.

3. Notwithstanding the provisions of paragraph 1 of this Article, pensions paid and other

payments made under a public scheme which is part of the social security system of a

Contracting State or a political subdivision or a local authority thereof shall be taxable only

in that State.

ARTICLE 18

GOVERNMENT SERVICE

1. (a) Salaries, wages and other similar remuneration paid by a Contracting State or a

political subdivision or a local authority thereof to an individual in respect of services

rendered to that State or subdivision or authority shall be taxable only in that State.

(b) However, such salaries, wages and other similar remuneration shall be taxable only in

the other Contracting State if the services are rendered in that other State and the

individual is a resident of that State who—



services.

2. (a) Notwithstanding the provisions of paragraph 1, pensions and other similar

remuneration paid by, or out of funds created by, a Contracting State or a political

subdivision or a local authority thereof to an individual in respect of services rendered

to that State or subdivision or authority shall be taxable only in that State.

(b) However, such pensions and other similar remuneration shall be taxable only in the

other Contracting State if the individual is a resident of, and a national of, that State.

3. The provisions of Articles 14, 15, 16 and 17 shall apply to salaries, wages, pensions and

other similar remuneration in respect of services rendered in connection with a business

carried on by a Contracting State or a political subdivision, local authority thereof.

ARTICLE 19

STUDENTS AND BUSINESS APPRENTICES

A student or business apprentice who is present in a Contracting State solely for the purpose

of the student’s education or training and who is, or immediately before being so present was, a

resident of the other Contracting State, shall be exempt from tax in the first-mentioned State on

payments received from outside that first-mentioned State for the purposes of the student’s

maintenance, education or training.

ARTICLE 20

PROFESSORS AND TEACHERS

1. Notwithstanding the provisions of Article 14, a professor or teacher who makes a temporary

visit to one of the Contracting States for a period not exceeding two years for the purpose of

teaching or carrying out research at a university, college, school or other educational

institution in that State and who is, or immediately before such visit was, a resident of the

other Contracting State shall, in respect of remuneration for such teaching or research, be

exempt from tax in the first-mentioned State.

2. The provisions of this Article shall not apply to income from research if such research is

undertaken not in the public interest but wholly or mainly for the private benefit of a specific

person or persons.

ARTICLE 21

OTHER INCOME


foregoing Articles of this Agreement shall be taxable only in that State.

2. The provisions of paragraph 1 shall not apply to income if the recipient of such income,

being a resident of a Contracting State, carries on business in the other Contracting State

through a permanent establishment situated therein and the right or property in respect of

which the income is paid is effectively connected with such permanent establishment. In

such case, the provisions of Article 7 shall apply.


Contracting State not dealt with in the foregoing Articles of the Agreement and arising in the

other Contracting State may also be taxed in that other State.

ARTICLE 22

ELIMINATION OF DOUBLE TAXATION

1. Double taxation shall be eliminated as follows—

(a) in the case of Mauritius—

(i) subject to the provisions of the law of Mauritius regarding the allowance as a

credit against Mauritius tax of tax payable in a territory outside Mauritius (which

shall not affect the general principle hereof), where a resident of Mauritius derives

profits or income from sources within South Africa and which, under the laws of

South Africa and in accordance with this Agreement are taxable or may be taxed

in South Africa, whether directly or by deduction, Mauritius shall allow the South

African tax payable as a credit against any Mauritius tax computed by reference to

the same profits or income by reference to which the South African tax payable is

computed;

(ii) in the case of a dividend, the credit referred to in subparagraph (a) (i) shall only

take into account such tax in respect thereof as is additional to any tax payable in

South Africa by the company on the profits out of which the dividend is paid and

is ultimately borne by the recipient of the dividend without any reference to any

tax so payable;

(iii) where a company which is a resident of South Africa pays a dividend to a

company which is a resident of Mauritius and which controls, directly or

indirectly, at least 10 per cent of the capital of the company paying the dividend,

the credit shall take into account (in addition to any South African tax for which

credit may be allowed under the provisions of subparagraph (a) (i) of this

paragraph) the South African tax payable by the first-mentioned company in

respect of the profits out of which such dividend is paid;

Provided that any credit allowed under this subparagraph shall not exceed the

Mauritius tax (as computed before allowing any such credit) which is appropriate to the

profits or income derived from sources within South Africa;

(b) in South Africa, subject to the provisions of the law of South Africa regarding the

deduction from tax payable in South Africa of tax payable in any country other than

South Africa (which shall not affect the general principle hereof), Mauritius tax paid by

residents of South Africa in respect of income taxable in Mauritius in accordance with

the provisions of this Agreement, shall be deducted from the taxes due according to

South African fiscal law. Such deduction shall not, however, exceed an amount which

bears to the total South African tax payable the same ratio as the income concerned

bears to the total income.

2. For the purposes of allowing South African tax as a credit in terms of subparagraph (a) of

paragraph 1, the tax payable in South Africa shall be deemed to include the tax which is

otherwise payable in South Africa but has been reduced or waived by South Africa in order

to promote economic development.

ARTICLE 23

NON-DISCRIMINATION


taxation or any requirement connected therewith which is other or more burdensome than


circumstances, in particular with respect to residence, are or may be subjected. This

provision shall notwithstanding the provisions of Article 1, also apply to persons who are

not residents of one or both of the Contracting States.



taxation levied on enterprises of that other State carrying on the same activities. This

provision shall not be construed as obliging a Contracting State to grant to residents of the

other Contracting State any personal allowances, reliefs and reductions for taxation purposes

on account of civil status or family responsibilities which it grants to its own residents.

3. Except where the provisions of paragraph 1 of Article 9, paragraph 8 of Article 11 or

paragraph 6 of Article 12 apply, interest, royalties and other disbursements paid by an

enterprise of a Contracting State to a resident of the other Contracting State shall, for the

purpose of determining the taxable profits of such enterprise, be deductible under the same

conditions as if they had been paid to a resident of the first-mentioned State.



shall not be subjected in the first-mentioned State to any taxation or any requirement


requirements to which other similar enterprises of that first-mentioned State are or may be

subjected.

5. Nothing contained in this Article shall prevent South Africa from imposing on the profits

attributable to a permanent establishment in South Africa of a company, which is a resident

of Mauritius, a tax at a rate which does not exceed the rate of normal tax on companies by

more than five percentage points.

6. The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to

taxes of every kind and description.

ARTICLE 24

MUTUAL AGREEMENT PROCEDURE

1. Where a person considers that the actions of one or both of the Contracting States result or

will result for that person in taxation not in accordance with this Agreement, that person

may, irrespective of the remedies provided by the domestic law of those States, present a

case to the competent authority of the Contracting State of which the person is a resident or,

if the case comes under paragraph 1 of Article 23, to that of the Contracting State of which

the person is a national. The case must be presented within three years from the first

notification of the action resulting in taxation not in accordance with the provisions of this

Agreement.


is not itself able to arrive at an appropriate solution, to resolve the case by mutual agreement


taxation which is not in accordance with the Agreement. Any agreement reached shall be

implemented notwithstanding any time limits in the domestic law of the Contracting States.


agreement any difficulties or doubts arising as to the interpretation or application of this

Agreement. They may also consult together for the elimination of double taxation in cases

not provided for in this Agreement.



When it seems advisable in order to reach agreement to have an oral exchange of opinions,

such exchange may take place through a commission consisting of representatives of the

competent authorities of the Contracting States.

ARTICLE 25

EXCHANGE OF INFORMATION


foreseeably relevant for carrying out the provisions of this Agreement or to the

administration or enforcement of the domestic laws concerning taxes of every kind and

description imposed on behalf of the Contracting States, or of their political subdivisions in

so far as the taxation thereunder is not contrary to the Agreement. The exchange of

information is not restricted by Articles 1 and 2.

2. Any information received under paragraph 1 by a Contracting State shall be treated as secret

in the same manner as information obtained under the domestic laws of that State and shall

be disclosed only to persons or authorities (including courts and administrative bodies)

concerned with the assessment or collection of, the enforcement or prosecution in respect of,

the determination of appeals in relation to the taxes referred to in paragraph 1, or the

oversight of the above. Such persons or authorities shall use the information only for such

purposes. They may disclose the information in public court proceedings or in judicial

decisions.

3. In no case shall the provisions of paragraph 1 of this Article be construed so as to impose on

a Contracting State the obligation—

(a) to carry out administrative measures at variance with the laws or the administrative


(b) to supply information which is not obtainable under the laws or in the normal course of

the administration of that or of the other Contracting State;

(c) to supply information which would disclose any trade, business, industrial, commercial

or professional secret or trade process, or information, the disclosure of which would

be contrary to public policy (ordre public).

4. If information is requested by a Contracting State in accordance with this Article, the other

Contracting State shall use its information gathering measures to obtain the requested

information, even though that other State may not need such information for its own tax

purposes. The obligation contained in the preceding sentence is subject to the limitations of

paragraph 3 but in no case shall such limitations be construed to permit a Contracting State

to decline to supply information solely because it has no domestic interest in such

information.

5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to

decline to supply information solely because the information is held by a bank, other

financial institution, nominee or person acting in an agency or a fiduciary capacity or

because it relates to ownership interests in a person.

ARTICLE 26

ASSISTANCE IN COLLECTION OF TAXES


claims. This assistance is not restricted by Articles 1 and 2. The competent authorities of the

Contracting States may by mutual agreement settle the mode of application of this Article.

2. The term ―revenue claim‖ as used in this Article means an amount owed in respect of taxes

of every kind and description imposed on behalf of the Contracting States, or of their

political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to

this Agreement or any other instrument to which the Contracting States are parties, as well

as interest, administrative penalties and costs of collection or conservancy related to such

amount.

3. When a revenue claim of a Contracting State is enforceable under the laws of that State and

is owed by a person who, at that time, cannot, under the laws of that State, prevent its

collection, that revenue claim shall, at the request of the competent authority of that State, be

accepted for purposes of collection by the competent authority of the other Contracting

State. That revenue claim shall be collected by that other State in accordance with the



4. When a revenue claim of a Contracting State is a claim in respect of which that State may,

under its law, take measures of conservancy with a view to ensure its collection, that


purposes of taking measures of conservancy by the competent authority of the other

Contracting State. That other State shall take measures of conservancy in respect of that

revenue claim in accordance with the provisions of its laws as if the revenue claim were a

revenue claim of that other State even if, at the time when such measures are applied, the

revenue claim is not enforceable in the first-mentioned State or is owed by a person who has

a right to prevent its collection.

5. Notwithstanding the provisions of paragraphs 3 and 4, a revenue claim accepted by a

Contracting State for purposes of paragraphs 3 or 4 shall not, in that State, be subject to the

time limits or accorded any priority applicable to a revenue claim under the laws of that

State by reason of its nature as such. In addition, a revenue claim accepted by a Contracting

State for the purposes of paragraph 3 or 4 shall not, in that State, have any priority

applicable to that revenue claim under the laws of the other Contracting State.



Contracting State.

7. Where, at any time after a request has been made by a Contracting State under paragraph 3

or 4 and before the other Contracting State has collected and remitted the relevant revenue

claim to the first-mentioned State, the relevant revenue claim ceases to be—

(a) in the case of a request under paragraph 3, a revenue claim of the first-mentioned State

that is enforceable under the laws of that State and is owed by a person who, at that

time, cannot, under the laws of that State, prevent its collection, or

(b) in the case of a request under paragraph 4, a revenue claim of the first-mentioned State

in respect of which that State may, under its laws, take measures of conservancy with a

view to ensure its collection.

the competent authority of the first-mentioned State shall promptly notify the competent

authority of the other State of that fact and, at the option of the other State, the first-

mentioned State shall either suspend or withdraw its request.

8. In no case shall the provisions of this Article be construed so as to impose on a Contracting

State the obligation—



(b) to carry out measures which would be contrary to public policy (ordre public);


measures of collection or conservancy, as the case may be, available under its laws or

administrative practice;

(d) to provide assistance in those cases where the administrative burden of that State is

clearly disproportionate to the benefit to be derived by the other Contracting State.

ARTICLE 27

MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS

Nothing in this Agreement shall affect the fiscal privileges of members of diplomatic


special agreements.

ARTICLE 28

ENTRY INTO FORCE

1. Each of the Contracting States shall notify to the other in writing, through the diplomatic

channel, of the completion of the procedures required by its legislation for the entry into

force of this Agreement. The Agreement shall enter into force on the date of receipt of the

later of these notifications.

2. The provisions of the Agreement shall have effect—

(a) in Mauritius, on income for any income year beginning on or after the first day of

January next following the date upon which the Agreement enters into force; and


(i) with regard to taxes withheld at source, in respect of amounts paid or credited on

or after the first day of January next following the date upon which the Agreement

enters into force; and

(ii) with regard to other taxes, in respect of taxable years beginning on or after the

first day of January next following the date upon which the Agreement enters into

force.

3. Agreement between the Government of the Republic of Mauritius and the Government of

the Republic of South Africa for the avoidance of double taxation and the prevention of

fiscal evasion with respect to taxes on income, signed at Pretoria on 5 July 1996, shall be

terminated with effect from the date of entry into force of this Agreement and shall cease to

have effect for any period thereafter for which the provisions of this Agreement shall apply.

ARTICLE 29

TERMINATION

1. This Agreement shall remain in force indefinitely but either of the Contracting States may

terminate the Agreement through diplomatic channels, by giving to the other Contracting

State written notice of termination not later than 30 June of any calendar year starting five

years after the year in which the Agreement entered into force.

2. In such event the Agreement shall cease to have effect—

(a) in Mauritius, on income for any income year beginning on or after the first day of

January next following the calendar year in which such notice is given; and


(i) with regard to taxes withheld at source, in respect of amounts paid or credited on

or after the first day of January next following the calendar year in which such

notice is given; and

(ii) with regard to other taxes, in respect of taxable years beginning on or after the

first day of January next following the calendar year in which such notice is gven.

(Editorial Note: Wording as per original Government Gazette. It is suggested that the phrase

―notice is gven‖ is intended to be ―notice is given‖.)

IN WITNESS WHEREOF the undersigned, being duly authorised thereto by their

respective Governments, have signed this Agreement in two originals, in the English language.

DONE at Maputo, on this 17th day of May in the year 2013.




REPUBLIC OF MAURITIUS

PROTOCOL

At the signing of the Agreement concluded between the Government of the Republic of

South Africa and the Government of the Republic of Mauritius for the avoidance of double

taxation and the prevention of fiscal evasion with respect to taxes on income, the undersigned

have agreed that the following provisions shall form an integral part of the said Agreement—

1. If, in an agreement for the avoidance of double taxation that may subsequently be concluded

between South Africa and a third State, the rates for taxation of dividends in the source State

are lower than those specified in subparagraphs 2 (a) and (b) of Article 10, South Africa

shall immediately inform the Government of Mauritius in writing through the diplomatic

channel and shall promptly enter into negotiations with the Government of Mauritius with a

view to providing comparable treatment as may be provided for the third State.

2. With reference to Article 23, paragraph 5, it is understood that should South Africa abolish

the secondary tax on companies without replacing it with a similar tax, the provisions of that

paragraph shall cease to have effect from the date on which the secondary tax on companies

is abolished.

IN WITNESS WHEREOF the undersigned, being duly authorised thereto by their

respective Governments, have signed this Protocol in two originals, in the English language.

DONE at Maputo on this 17th day of May in the year 2013.




REPUBLIC OF MAURITIUS

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