Module 4 - Specific Inclusions Lecture Notes PDF

1 Number of handouts Handouts include 1. Slides 2. Module outline Presented by: 3. Case Law pack Tsireledzo Mulaudzi 4. Tutorials CTA(SA)...

1 Number of handouts Handouts include 1. Slides 2. Module outline Presented by: 3. Case Law pack Tsireledzo Mulaudzi 4. Tutorials CTA(SA) 2 2  Lecture Outcomes By the end of this lecture, you should be able to: 1. Specific inclusions Identify and explain which amounts should specifically be included in in gross income ‘gross income’, even though these amounts may be of a capital nature and support your opinion with the relevant authority Demonstrate your knowledge through practical examples (theory and calculation-based scenarios). © University of the Witwatersrand 3 3 Learning Agenda  Annuities - Par (a)  Alimony payments - Par (b)  Services - Par (c)  Restraint of trade - Paras (cA) & (cB)  Services – compensation for termination of employment - Par (d)  Fund benefits - Paras (e) & (eA)  Services- Commutation of amounts due - Par (f)  Lease premiums - Par (g)  Compensation for imparting knowledge and information - Par (gA)  Leasehold improvements - Par (h)  Fringe benefits - Par (i)  Proceeds from the disposal of certain assets - Par (jA)  Dividends - Par (k)  Key-man insurance policy proceeds - Par (m)  Recoupments and other inclusions - Par (n) © University of the Witwatersrand 4 4  Resources SILKE: First Touch to Tax 2024 M.Stiglingh – Chapter 4 (pg. 59 – 77) © University of the Witwatersrand 5 5 Framework – Normal tax payable (company) Description Amount Gross Income (definition in s 1(1)) xxx Less: Exempt Income (s 10)) (xxx) Equals: Income (as defined in s 1(1)) xxx Less: Deductions and capital allowances (various, but excluding s18A) (xxx) Less: Assessed loss brought forward (s 20 and s 20B) (Tax III) (xxx) Add: Amounts included in taxable income xxx Add: Taxable capital gain (s 26A) xxx Subtotal xxx Less: s 18A deduction (Donations to PBOs) (Tax III) (xx) TAXABLE INCOME XXX 28%/27% of taxable income XXX Less: s 6quat rebate (Tax III) (xxx) NORMAL TAX PAYABLE XXX © University of the Witwatersrand 6 6 Framework – Normal tax payable (natural person) Description Amount Gross Income (general and specific inclusions in s 1(1), s 7, s 8(4)(a)) xxx Less: Exempt Income (s 10, s 10 - s10C, s 12T exemptions) (xxx) Equals: Income (as defined in s1(1)) xxx Less: Deductions and capital allowances (ss 11 -19, ss 21-24P, excl. s 11F & s 18A) (xxx) Less: Assessed loss brought forward (s 20 - s 20B) (Tax III) (xxx) Add: Amounts included in taxable income (e.g. s 8(1)(a)) xxx Add: Taxable capital gain (s 26A) xxx Less: Deductions in terms of s 11F (Tax III) (xxx) Subtotal xxx Less: s 18A deduction (Donations to PBOs) (Tax III) (xxx) TAXABLE INCOME XXX Normal tax per progressive tax table (based on taxable income) XXX Less: s 6 Rebates (primary, secondary, tertiary) and s 6quat rebate (Tax III) (XXX) Add: Additional tax in terms of s 12T(7)(a) xxx Add: Normal tax payable on the taxable income of lump sums (Tax III) xxx Less: S 6A and s 6B tax credits (Tax III) (xx) NORMAL TAX PAYABLE XXX © University of the Witwatersrand 7 7 Introduction  ‘Gross income’ is defined in s 1(1) of the Income Tax Act.  After the general gross income definition, paragraphs (a) to (n) follows. These paragraphs include specific amounts in gross income, even though these amounts may be capital in nature.  Specific provisions override general provisions - specific provisions  A list of specific inclusions in gross income is set out on the following slide: © University of the Witwatersrand 8 8  SPECIFIC INCLUSIONS IN GROSS INCOME SECTION 1(1): GROSS INCOME 1 Annuities Par (a) 2 Alimony payments Par (b) 3 Services Par (c) 4 Restraint of trade Paras (cA) & (cB) 5 Services – compensation for termination of employment Par (d) Specific 6 Fund benefits Paras (e) & (eA) 7 Services- Commutation of amounts due Par (f) Inclusions 8 Lease premiums Par (g) 9 Compensation for imparting knowledge and information Par (gA) 10 Leasehold improvements Par (h) 11 Fringe benefits Par (i) 12 Proceeds from the disposal of certain assets Par (jA) 13 Dividends Par (k) 14 Key-man insurance policy proceeds Par (m) 15 Recoupments and other inclusions Par (n) © University of the Witwatersrand 9 9 Annuities – Par (a) Description Detail Par (a) Par (a) includes in gross income any an annuity, living annuity and annuity amount per s10A(1) (purchased annuity) Definitions Annuity Not defined in s 1(1) of the Income Tax Act. The 4 main characteristics of an annuity (Hogan case):  It is an annual payment  It is a repetitive payment  It is chargeable against some person;  A capital amount (debt) settled in installments, is NOT an annuity. Living Defined in s(1)(1) of Income Tax Act. annuity Annuities earned by a member of any retirement fund on or after the retirement date of the member. © University of the Witwatersrand 10 10  Annuities – Par (a) Description Detail Definitions Annuity Defined in s 10A(1) of the Income Tax Act. amount Annuity amounts (purchased annuities) are purchased from insurers (insurance companies) for cash consideration. Total annuity amount earned included in gross income and the capital part is exempt from tax in terms of s 10A(2) – module 5. Par (a) Par (a) excludes any insurance policy payouts received (directly or indirectly) by an employee specifically or director in respect of employer-owned insurance policies(par (d)(ii); Par (a) specifically excludes excludes par (d)(ii). © University of the Witwatersrand 11 11 Annuities: Par (a) – Example & Solution Annuities? A Mr. Sebastien Kidd died on 1 May 2014. Mr. Kidd’s previous employer now X pays his pension to Mr. Kidd’s widow, Carrie. The employer can terminate Pension – terminable these payments whenever the employer want. (employer not obliged to pay pension) B Mr. Sebastien Kidd died on 1 May 2014. Mr. Kidd’s previous employer  contractually bound themselves to pay the pension for life to Mr. Kidd’s widow, Pension – not terminable Carrie. (employer obliged to pay pension) C Mr. Holmes makes payments towards Watson’s studies. The payments are X voluntary and occur on a regularly basis. Voluntary payments toward studies D Mr. Holmes makes payments towards Watson’s studies on a monthly basis, based on a contractual obligation. When Mr Home’s contractually agreed to  pay for Watson’s studies, Watson was undecided on whether he was going to Contractual payment toward studies pursue a career in finance, the medical field or engineering. Watson at the time was also unsure of the institution that he would study at. The contractual obligation is binding until Watson has completed his studies. © University of the Witwatersrand 12 12  Annuities: Par (a) – Example & Solution Annuities? E Mr. Rich purchased a boat from Mr. Smith for R5 million X payable over a 5-year period at a rate of R1 million per year. Instalment on sale of capital asset © University of the Witwatersrand 13 13 Alimony or maintenance payments - Par (b) Description Detail Par (b) Par (b) includes in gross income any amount payable to the taxpayer:  by his/her spouse or former spouse that constitute alimony, allowance or maintenance payments in terms of any judicial order, written agreement of separation or order of divorce.  in terms of a maintenance order for the maintenance of a child per the Maintenance Act. Tax Paying No deduction - consequences spouse Receiving Gross income - Par (b) inclusion in gross R20 000 spouse income (R20 000) Exempt income - S 10(1)(u) exemption** Income - as defined **Refer to Module 5 - Exempt income © University of the Witwatersrand 14 14  Services – Par (c) Description Detail Par (c) Par (c) includes in gross income any amounts earned by a taxpayer that relates to:  services rendered or to be rendered  employment  holding of an office** ** Refers to e.g. directors of a company Par (c) Voluntary awards received for services rendered (or employment) are specifically included in par (c) specifically includes The anti-avoidance provision (proviso (ii) par (c)) stipulates that an amount received by a person in respect of services rendered by another person is included in the gross income of the person who renders the service. Par (c) Fringe benefits (par (i)) are excluded from the scope of par (c). Par (c) does not apply if the specifically provisions of par (i) applies (proviso (i) par (c)). excludes S 8(1) allowances are specifically excluded from par (c). S 8(1) allowances (e.g., travel allowances given to employees) need to be included in taxable income (NOT gross income). Refer to normal tax payable framework. © University of the Witwatersrand 15 15 Services – Par (c) Description Detail NB! 3 important principles to consider in respect to par (c):  There needs to be a causal relationship between the amount received and the services rendered (or employment):  There needs to be a link between the amount received and the services that the person rendered; that is, the payment needs to be a reward for services rendered. From: Notes on South African Income Tax 2023: P Haupt – pg. 61 & 62  A causal relationship does not ONLY exists in an employer-employee relationship.  Stevens case (refer to Special inclusion case law pack)  The term ‘in respect of’ suggests a causal relationship between the receipt and the taxpayers service or employment.  The ex gratia (voluntary) payment made by the company to the taxpayer was directly linked to the taxpayer’s services and employment. As there was a causal relationship between the taxpayer’s employment and the receipt, such receipt fell within par (c). © University of the Witwatersrand 16 16  Services – Par (c) Description Detail  Specific provisions override general provisions - specific provisions (such as par (c)) overrides general provisions (such as the general gross income definition).  Long service award - Long service award can be in a form of cash. If the reward is less than R5 000 then they are not included in terms of par (c) (Vii). © University of the Witwatersrand 17 17 Services rendered: Par (c) – Example  Joy is a sole proprietor who programmes and repairs computers for a living.  Joy is a resident for tax purposes. Required: Advise Joy if the following amounts should be included in her gross income for the 2024 year of assessment. Give a brief reason for your answer. © University of the Witwatersrand 18 18  Services rendered: Par (c) – Solution Description Reason Amount A Joy received an amount of R7 000 on Taxed on the earlier of receipt or accrual. Therefore, she would - 3 March 2023 for a repair job that she have been taxed in the 2023 year of assessment as the service performed on 15 February 2023. was performed on 15 February 2023. No par (c) inclusion in gross income for the 2024 year of assessment. B Joy went to New Zealand to visit her Received for services rendered and resident taxed on worldwide R8 000 brother during the month of August receipts and accruals. Therefore, the amount of R8 000 will be 2023. While she was there, she fixed included in Joy’s gross income for the 2024 year of assessment a few computers and earned the in terms of par (c) of the gross income definition. equivalent of R8 000. C Joy sold her personal computer to a Par (c) does not apply, as the amount received was not for - friend for R1 500 on 1 October 2023. services rendered. The personal computer sold is of a capital in nature and therefore the proceeds will not be included in gross income. © University of the Witwatersrand 19 19 Services rendered: Par (c) – Solution For whom Tax consequences Calculation D On 6 November 2023 Joy made a Causal link between service rendered and the R3 000 deal with a client that she would donation. Therefore, the amount of R3 000 will be write some programme codes for included in Joy’s gross income for the 2024 year of the client’s computer. In payment, assessment in terms of par (c) of the gross income the client agreed to donate a definition. computer to the value of R2 000 and a printer to the value of R1 000 to Joy. © University of the Witwatersrand 20 20  Restraint of trade payments: Par (cA) & par (cB) Description Detail Par (cA) & Restraint of trade payments are capital in nature. Certain restraint of trade payments are, however, Par(cB) specially included in gross income in terms of par (cA) or par (cB). From: Notes on South African Income Tax 2024 – P Haupt – page 63 Definition of Restraint of trade payments are compensation for the restriction or loss of a person’s right to freely restraint of trade. Thus, a payment NOT to render services. trade From: Notes on South African Income Tax 2024 – P Haupt – page 63 payments Par (cA) & Any restraint of trade payments received by (or accrued to) the following persons are specifically included Par(cB) in gross income:  is or was a ‘labour broker’ without a certificate of exemption (par (cA) or  is or was a ‘personal service provider’ (par (cA); or  is or was a ‘personal service company’ or ‘personal service trust (par c(A));  a natural person in respect of present, past or future employment or holding of an office is specially included in gross income in terms of par(cB). 21 21 Restraint of trade payments: Par (cA) & par (cB) Description Detail NB! If a natural person receives a restraint of trade payment that does NOT relate to employment, the restraint of trade payment will NOT be included in gross income as it is of a capital nature. Tax consequences Recipient of restraint of The receipt is taxed immediately and in full in the hands of the recipient. trade payment Payer of the restraint of The payer of the restraint of trade will be allowed to claim a deduction trade under s 11(cA) provided the recipient is taxed under par (cA). The deduction in the hands of the payer must be spread over a certain period in accordance with section 11(cA). Section 11 (cA) deduction will be coved in module 8. © University of the Witwatersrand 22 22  Restraint of trade payments: Par (cB) - Example  Mr. Small was retrenched by his employer on 12 September 2023.  Mr. Small had befriended many of the customers who had been serviced by his former employer. As a result, if he became employed by a competing employer, he would be able to poach many of his former employer’s customers.  Mr. Small’s former employer therefore paid him R500 000 on 30 September 2023 for him not to work for a competitor within the region for a period of four years. Required: To determine whether any amount will be included in Mr. Small’s gross income for the 2024 year of assessment. © University of the Witwatersrand 23 23 Restraint of trade payments: Par (cB) Solution Description Reason Amount included in gross income Mr. Small received R500 000 for him The R500 000 was received as consideration for a R500 000 not to work for a competitor within restraint of trade imposed on Mr Big (a natural person). (Included in full in the area for a period of 4 years The receipt was directly linked to Mr Small’s past the 2024 year of (Restraint of trade payment) employment and therefore was received by Mr Small in assessment) respect of past employment. Included per par (cB) of the gross income definition © University of the Witwatersrand 24 24  Restraint of trade payments: Par (cB) - Example  On 06 January 2023 Miss Curls purchased a hair salon business, called ‘Frotec International’ from Mr. James.  Mr. James carried on his business as a sole proprietor.  In order to avoid an erosion of Frotec International’s client base, Miss Curls included a restraint of trade clause in the purchase agreement.  On 15 February 2023, Miss Curls paid Mr. James an amount of R550 000, for him not to open nor work in a hair salon business within a 10 km radius of Frotec International for the next 2 years. Required: To determine whether any amount will be included in Mr. James's gross income for the 2024 year of assessment. © University of the Witwatersrand 25 25 Restraint of trade payments: Par (cB) - Solution Description Reason Amount included in gross income R550 000 received not to open nor The restraint of trade payment received by Mr. R- work in a hair salon business within James does not relate to past, present or a 10km radius of Frotec future employment (or the holding of office) International for the next 2 years – and is therefore not included in his gross (Restraint of trade payment) income in terms of par (cB) of the gross income definition. As the amount is of a capital nature, it will also not be included in his gross income in terms of the general gross income definition. NB! Always consider specific inclusions first (such as par (cB)), thereafter consider the general gross income definition. © University of the Witwatersrand 26 26  Services - compensation for termination of employment - Par (d) Description Detail Par (d) Paragraph (d) includes in gross income:  any amounts received (or accrued) due to the termination or variation of any office or employment (including death) (par d(i)); or  any insurance policy payouts received (directly or indirectly) in respect of employer-owned insurance policies (par (d)(ii)); or  the value of any insurance policy (excluding a risk policy) ceded to an employee or director by employer (par d(iii)) Par (d) amounts earned by employee (director) Amounts received due Insurance policy payouts The value of any insurance to the termination or variation of received (directly or indirectly) policy (excl. a risk policy) employment (incurred by in respect of employer) ceded to an employee by employer-owned insurance employer (par d(iii)) (par d(i)) policies (par (d)(ii)) © University of the Witwatersrand 27 27 Services - compensation for termination of employment - Par (d) Description Detail NB! Par (d)(i) The meaning of the terms:  ‘termination’ – loss of employment or holding of an office  ‘variation’ – amendment of employment conditions e.g. leave policy changes Par (d)(ii) Employer-owned insurance policies – employer is the holder of the policy These amounts are specifically excluded from par (a). Par (d) specially includes any voluntary amounts received that fall within the scope of par (d). Such amounts do not need to be paid in terms of a contract. Examples Par (d)(i):  Employee retires and employer pays employee an amount for loyal services over the years. From: A Student’s Approach to Income Tax /Natural person 2020:K Coetzee page 76  An amount (which constitutes the unexpired portion of employee’s contact) was received by an employee from his employer for breach of his employment contract (e.g., due to early termination of contract).  An amount received by a director for surrendering his/her right to a permanent directorship. © University of the Witwatersrand 28 28  Services - compensation for termination of employment - Par (d) Description Detail Examples  Any compensation paid by an employer in respect of the death of an employee. The death of the employee must arise out of and in the course of the employee’s employment. Par (d)(ii)  Payouts (directly or indirectly) from life insurance policies where the employer is the holder of the insurance policy (employer-owned insurance policy)). Par (d) is subject  Lump sums from retirement funds are excluded from par (d)(i) and (d)(ii). It is dealt with in par (e) of to the gross income definition - (proviso (aa)) 3 provisos  2 deeming provisions:  Par (d)(i) includes death. Amounts that become payable in consequence of or following the death of any employee’s (or director) is deemed to be an amount which accrued to the employee or director immediately before his or her death - (proviso (bb)).  Insurance policy payouts (ss (d)(ii) and (d)(iii)) received or accrued to a dependant or nominee of the employee or director, is deemed to be received by or accrued to the employee or director – (proviso (cc)) From: Notes on South African Income Tax 2024: P Haupt – page 64 & Silke: First Touch to Tax 2024: M Stinglingh – page 68 © University of the Witwatersrand 29 29 Services - compensation for termination of employment: Par (d) - Example John (33 years old and unmarried) is a RSA resident. John designs websites and is in the full-time employment of Webdezine CC, an RSA close corporation. Webdezine often sends him to provide training to its clients in the United States of America (USA). John’s receipts and accruals during the 2024 year of assessment were as follows: Description Notes Amount Salary Note 1 R192 000 Lump sum from employer Note 2 R32 000 Leave conditions amended Note 3 R4 000 Note 1 John’s salary was divided between the periods that he worked in the RSA and the USA (he was, however, at all times an RSA resident): South Africa R128 000 (8 months) USA R 64 000 (4 months) Total R192 000 Note 2 In recognition of all his years of faithful service Webdezine voluntarily paid an amount equal to two months’ salary to John on 29 February 2024. © University of the Witwatersrand 30 30  Services - compensation for termination of employment: Par (d) - Example Note 3 Due to the recession Webdezine amended the leave conditions of all its employees. From 1 June 2023 John is no longer entitled to paid study leave. To compensate him for this, Webdezine paid a once-off amount of R4 000 to John on 1 June 2023. Required: To calculate, with brief reasons or reference to legislation, John’s gross income for the 2024 year of assessment. Example adapted from Silke: First Touch to Tax 2024 – M Stiglingh page 75 – 77 © University of the Witwatersrand 31 31 Services - compensation for termination of employment: Par (d) - Solution Description Notes Amount Gross income Salary Par (c) of the gross income definition (services rendered) R192 000 OR services rendered - specific inclusion Lump sum Par (c) of the gross income definition (services rendered) OR R32 000 services rendered - specific inclusion Not par (d) as employment conditions were not amended nor was the employment terminated. Leave conditions Par (d) of the gross income definition (lump sum from employer) OR R4 000 Par (f) of the gross income definition (amount received in commutation of paid study leave that was due to taxpayer in terms of employment contract) OR Lump sum from employer - specific inclusion Total R228 000 © University of the Witwatersrand 32 32  Fund benefits: Par (e) & Par (eA) Description Detail Par (e) Par (e) includes in gross income lump sums received from retirement funds (pension funds, provident funds, retirement annuity funds etc). From: Notes on South African Income Tax 2024 – P Haupt – page 65 Par (e) includes in gross income both a ‘retirement fund lump sum benefit’ and ‘retirement fund lump sum withdrawal benefit’. The taxable portion of the lump sum benefit is included in gross income and NOT the gross lump sum benefit received. For Tax II purposes, the taxable portion will be provided. Par (e) excludes Par (e) excludes amounts included in terms of par (eA). Example Andile elects to retire from a pension fund on 29 February 2024. A lump sum benefit of R600 000 accrues to him on this date. The taxable portion of the lump sum benefit amounts to R581 400. Required: What amount, if any, should be included in Andile’s gross income for the 2024 year of assessment? Taxable portion – R581 400 © University of the Witwatersrand 33 33 Fund benefits: Par (e) & Par (eA) Description Detail Par (eA) Par (eA) applies to a member of a state pension fund that for example:  transfers amounts to a provident fund; or  withdraws (resigns) from the state pension fund or utilised the benefits to redeem a debt: The 2/3 rule applies – i.e.  2/3 of their benefits transferred from their state pension fund (public sector pension fund) to a public or private sector provident fund will be included in gross income par (eA).  2/3 of their benefits withdrawn from the state pension fund (public sector pension fund) or utilised to redeem a debt included will be included gross income par (eA). This inclusion is also applicable in the case of a conversion from a public sector pension fund to a provident fund as well as in terms of divorce proceedings where any part of a member’s benefits should be paid to his/her former spouse. © University of the Witwatersrand 34 34  Services - commutation of amounts due – Par (f) Description Detail Par (f) Par (f) includes in gross income any amounts received or accrued in commutation of (in substitution of), amounts due under a contract of employment or services. Commutation When a person substitutes his/her right to a specific benefit, for a right to obtain another benefit. definition From: Silke: First Touch to Tax 2024 – M Stinglingh – page 71 NB! In view of the wide scope of par (d), there is little need for par (f) which was enacted many years prior to the enactment of par (d). © University of the Witwatersrand 35 35 Lease premiums - Par (g) Description Detail Par (g) Par (g) includes in gross income any amount received (or accrued) from another person as a (lease) premium or like consideration for the use (or the right of use) of land or buildings; plant or machinery; motion picture films, television films, videotape or disc (or connected sound recordings or advertising matter); patent or design or trademark, copyright etc. Definition of lease The term lease premium is not defined in section 1(1) of the Income Tax Act, case law is therefore premiums referred to for guidance. In terms of case law CIR v Butcher Bros. (Pty) Ltd), lease premiums are amounts paid by:  the lessee to the lessor,  whether in cash or otherwise,  for the use (or right of use) of certain assets (e.g., land, buildings etc.)  Use – an ‘upfront payment’ for use of assets  Right of use – an ‘upfront payment’ for a right to enter into an agreement to lease the assets  distinct from and in addition to OR instead of rent (that is, a payment over and above the monthly rentals) Generally, a lease premium is received as a cash lump sum at the commencement of lease and not refundable. All of the above from: Notes on South African Income Tax 2024 – P Haupt – page 66 – 68 © University of the Witwatersrand 36 36  Lease premiums: Par (g) Description Detail NB! Not lease premiums:  a rental deposit – to cover damages  upfront rental receipt (bullet rental) – nature remains rent e.g. rental received in advance Tax consequences Lessor The entire amount of the premium is included in gross income in the year in which it is received by or accrues to the lessor (par (g)). Lessee Section 11(f) deduction may be claimed. The deduction is spread over the probable duration of use or occupation but limited to 25 years. Covered in module 9 - Capital Allowances and Recoupments Lessee sublets Par (g) may also apply if a lease premium is paid by a sub-lessee to a sub-lessor (the principal property lessee). From: SARS Interpretation note 109 issue 7 Feb 2019 page 6 Lessee cedes or If the right to lease the land is ceded or disposed of by a lessee to a third person for a fixed amount, it disposes of the will not be a lease premium; that is, merely consideration (purchase price) paid by the new lessee right to lease the to the former lessee. land © University of the Witwatersrand 37 37 Lease premiums: Par (g) Example Adam Jay agrees to lease land to Evan Ross for an upfront lump-sum payment of R100 000. In terms of the lease agreement, the monthly rental amounts to R25 000 and is payable on the first day of each respective month. Required: Does the R100 000 constitute a lease premium? Example adapted from Silke: First Touch to Tax 2024 – M Stiglingh page 72 Solution: © University of the Witwatersrand 38 38  Lease premiums: Par (g) Example Adam Jay agrees to lease land to Evan Ross for an upfront lump-sum payment of R100 000. In terms of the lease agreement, the monthly rental amounts to R25 000 and is payable on the first day of each respective month. Required: Does the R100 000 constitute a lease premium? Example adapted from Silke: First Touch to Tax 2024 – M Stiglingh page 72 Solution: The term lease premium is not defined in section 1(1) of the Income Tax Act, case law is therefore referred to for guidance. In terms of case law (CIR v Butcher Bros. (Pty) Ltd), lease premiums are amounts paid by: ▪ lessees to lessors, ▪ whether in cash or otherwise, ▪ for the use (or right of use) of certain assets ▪ distinct from and in addition to OR instead of rent © University of the Witwatersrand 39 39 Lease premiums: Par (g) The R100 000 is a cash amount paid by Evan Ross (the lessee) to Adam Jay (the lessor). The amount was paid upfront by the lessee to obtain a right to enter into an agreement to lease the land. The R100 000 payment made by the lessee was therefore to obtain the right of use of the land. The R100 000 lump sum payment is separate from and over and above the monthly rental payments of R25 000. Accordingly, the R100 000 is distinct from and in addition to the monthly rental payments of R25 000. The R100 000, therefore, constitutes a lease premium. Example adapted from Silke: First Touch to Tax 2024 – M Stiglingh page 72 © University of the Witwatersrand 40 40  Compensation for imparting knowledge and information - Par (gA) Description Detail Par (gA) Par (gA) includes in gross income any amount received or accrued for:  imparting STIC knowledge or information or  providing assistance with the application or utilisation of STIC knowledge or information The above refers to ‘know-how’ payments. STIC - Scientific, Technical, Industrial or Commercial NB! ‘Imparting’ suggests that the person providing the information needs to render a service to the person obtaining the information. From: Notes on South African Income Tax 2024: P Haupt – page 68 © University of the Witwatersrand 41 41 Leasehold improvements - Par (h) Description Detail Par (h) The lessor (owner) must include the value of the improvements effected on his land or to his buildings by the lessee in gross income (par (h)). Definition of a Leasehold improvement - when a lessee make an improvement to property leased from the lessor. leasehold From: Notes on South African Income Tax 2024 – P Haupt – page 69 improvement NB! The inclusion only applies if the lessor has a right to have the improvements effected to his property. Thus, an agreement obliging the lessee needs to exist. Amount and accrual Refer to table on the next slide date of the leasehold Improvement Tax consequences Lessor Leasehold improvement will be in gross income in terms of par (h) and taxed in full. May receive relief in terms of s 11(h) – (covered later in module 9) Lessee Entitled to allowance – s 11(g). Deductible over the lease term from completion of improvements but limited to 25 years. Covered in module 9 - Capital Allowances and Recoupments. © University of the Witwatersrand 42 42  Leasehold improvements - Par (h) Summary: Leasehold improvement - amount and accrual Leasehold improvement Amount to be Date of accrual included in gross income Amount stipulated in the lease Amount stipulated in agreement (even if the lessee When parties sign agreement agreement spent more) UNLESS refer to note 1 below Amount not stipulated in the lease Fair and reasonable value of the improvement Date of completion of the agreement improvements Note 1 If the leasehold agreement must meet certain specifications with a certain stated minimum value, then the fair and reasonable value of the improvement will be used and not merely the minimum stated amount. © University of the Witwatersrand 43 43 Leasehold improvements: Par (h) - Example John (33 years old and unmarried) is a RSA resident. Below is an extract from John’s receipts and accruals for the 2024 year of assessment: Description Notes Amount Rent received Note 1 R91 300 Leasehold improvements Note 1 ? Lease premium received Note 1 ? Note 1 John owns a house in Stellenbosch, which he let to the Khumalo couple for the whole year. The lease contract was concluded on 1 August 2022 and specified the following:  The Khumalo’s must pay a monthly rent of R8 300 from 1 August 2022. The Khumalo’s only paid the February 2024 rental on 15 March 2024. The Khumalo’s rented the house from 1 August 2022 until 31 July 2023.  The Khumalo’s are obligated to effect improvements to the house to the value of R40 000. Due to cash flow problems, the Khumalo’s only completed the improvements during April 2023 at an amount of R35 000. © University of the Witwatersrand 44 44  Leasehold improvements: Par (h) - Example  The lease term expired on 31 July 2023. However, the Khumalo’s had a preference right to lease the house again and paid a once-off amount of R6 000 as a lease premium (the right to occupy the house) on 1 August 2023. The monthly rent remained unchanged at R8 300. Required: To calculate, with brief reasons or reference to legislation, John’s gross income for the 2024 year of assessment. If an item is not included in gross income, provide a short reason by identifying the element that is not met. Example adapted from Silke: First Touch to Tax 2024 – M Stiglingh page 75 – 77 © University of the Witwatersrand 45 45 Leasehold improvements: Par (h) - Solution Description Notes Amount Gross income Rental S1(1): general gross income definition R99 600 February 2023 rental has already accrued Taxed on earlier of receipt or accrual R8 300 x 12 = R99 600 Lease hold Par (h) of the gross income definition - leasehold improvement must be included in R0 improvements gross income of lessor on the date of accrual Date of accrual - in the year contract was concluded (2023 year of assessment) as the amount is specified in the contract. The amount is specified in the contract and John (lessor) was taxed on R40 000 (irrespective of amount incurred by lessee) in 2023 Lease premium Par (g) of the gross income definition (lease premium) OR R6 000 Lease premium – specific inclusion Total R105 600 © University of the Witwatersrand 46 46  Fringe benefits - Par (i) Description Detail Par (i) Fringe benefits are included in gross income in terms of par (i) of the gross income definition. Definition Fringe benefits are non-cash benefits obtained by the employee from the employer. e.g., school fees paid by employer in respect of employee’s children. Notes on South African Income Tax 2024 – P Haupt – page 71 NB!  An employer-employee relationship is required.  Paragraph (i) overrides paragraph (c). A benefit or an advantage to which par (i) applies can therefore not be taken into account for par (c) ((provio (i) to par (c)) © University of the Witwatersrand 47 47 Proceeds from disposal of certain assets - Par (jA) Description Detail Par (jA) The proceeds from the disposal of a (capital) asset will be included in gross income,  if the capital asset sold was manufactured, produced, constructed or assembled by the taxpayer; AND  is similar to the trading stock manufactured, produced, constructed or assembled by the taxpayer for purposes of resale. Example E.g., a manufacturer of motor vehicles takes a vehicle from its trading stock (a revenue asset) to use as a staff vehicle/demonstration vehicle (a capital asset). When this vehicle is sold in a later year, the proceeds will be included in gross income in terms of par (jA). From: Notes on South African Income Tax 2024 – P Haupt – page 72 Manufacture vs Par (jA) applies to any asset that was manufacture, produced, constructed or assembled by the taxpayer. purchased It does NOT apply to any asset that was purchased by the taxpayer and later sold. From: Notes on South African Income Tax 2024 – P Haupt – page 72 © University of the Witwatersrand 48 48  Proceeds from disposal of certain assets: Par (jA) - Example A manufacturer of motor vehicles, A Ltd, uses one vehicle manufactured by it in its business operation as a demonstration model. It also gave the right of use of another similar vehicle manufactured by it to an employee as a fringe benefit (in the 2023 year of assessment). A Ltd disposed of both vehicles during the 2024 year of assessment for an amount of R280 000 per vehicle. Required: To calculate A Ltd.'s gross income for the 2024 year of assessment. Example adapted from Silke: First Touch to Tax 2024 – M Stiglingh page 74 © University of the Witwatersrand 49 49 Proceeds from disposal of certain assets: Par (jA) - Solution Description Notes Amount Gross income Sale of vehicles The full proceeds from the disposals (R280 000 per vehicle) are included in gross R560 000 income in the 2023 year of assessment in terms of par (jA) of the gross income definition.  A Ltd is a car manufacturer.  The vehicles (capital assets) that were sold were manufactured by A Ltd; AND  are similar to trading stock manufactured by A Ltd for resale. R280 000 x 2 = R560 000 Total R560 000 © University of the Witwatersrand 50 50  Dividends - Par (k) Description Detail Par (k) Par (k) includes in gross income South African dividends (local) and foreign dividends. Gross dividend The gross dividend is included in gross income. If a dividend is received after dividend withholding tax of vs. 20% was withheld it needs to be grossed up: net dividend Gross dividend = net dividend / 80% Exemption of Certain dividends may be exempt: dividends  South African (local) - s 10(1)(k)(i) – (covered in Module 5 - Exempt Income)  Foreign dividends - s 10B (Tax III) © University of the Witwatersrand 51 51 Dividends: Par (k) - Example John (33 years old and unmarried) is a RSA resident. Gross dividends of R49 000 accrued to John during the 2024 year of assessment: Description Notes Amount Dividends accrued Note 1 R49 000 Note 1 The following gross dividends accrued to John as a result of his shareholding in both RSA and Australian companies.  From South Africa: R32 000  From Australia: R17 000  Total: R49 000 Required: To calculate, with brief reasons or reference to legislation, John’s gross income for the 2024 year of assessment. If an item is not included in gross income, provide a short reason by identifying the element that is not met. Example adapted from Silke: First Touch to Tax 2024 – M Stiglingh page 75 – 77 © University of the Witwatersrand 52 52  Dividends: Par (k) - Solution Description Notes Amount Gross income Dividend income Par (k) of the gross income definition (local dividends and foreign dividends) OR R49 000 local dividends and foreign dividends - specific inclusion R32 000 + R17 000 = R49 000 Total R49 000 © University of the Witwatersrand 53 53 Key-man insurance policies proceeds - Par (m) Description Detail Par (m) Employers take out insurance policies to hedge themselves against loss of profits due to the death, disablement or illness of an employee or director. Proceeds from such insurance policies (e.g. key man policies) paid out to the employer is included in gross income in terms of par (m). From: Notes on South African Income Tax 2020 – P Haupt – page 73 Par (m)  The employer needs to be the policy holder; and requirements  The insurance policy needs to relate to death, disablement or illness of an employee or director (or former employee or director). NB!  Par (m) deals with insurance policy payouts received by an employer in respect of employer-owned insurance policy.  Par (d)(ii) deals with insurance policy payouts received (directly or indirectly) by an employee in respect of employer-owned insurance policy. © University of the Witwatersrand 54 54  Key-man insurance policies proceeds: Par (m) - Example An annual premium of R20 000 is paid by an employer for life insurance cover on the life of Mr. Blue (a director). The employer is the policy holder and beneficiary of this policy. A R1 000 000 was received by the employer on the death of Mr. Blue during the 2024 year of assessment. Required: Will any amount be included in the gross income of the employer for the 2024 year of assessment? Solution: The proceeds of R1 000 000 received by the employer in respect of a key-man insurance policy (employer is the policy holder and the policy relates to the death of an employee or director) will be included in the gross income of the employer in terms of par (m) for the 2024 year of assessment. © University of the Witwatersrand 55 55 Recoupments and other inclusions - Par (n) Description Detail Par (n) All amounts that are specifically included in a taxpayer’s income through other provisions of the Act are included in gross income in terms of par (n). Example S 8(4) – Recoupment Covered in module 9 - Capital Allowances and Recoupments 56 56  Exam technique – Specific inclusions Description Notes Amount Gross income Dividend income Par (k) of the gross income definition (local dividends and foreign dividends) R49 000 OR Specific inclusion - local dividends and foreign dividends Total R49 000 NB! NO marks will be awarded for merely stating that an amount is a specific inclusion. © University of the Witwatersrand 57 57 References for these slides  Notes on South African Income Tax 2024 - Phillip Haupt  SARS Interpretation Note 110 (7 February 2019)  SAICA Student Handbook 2023/2024  SILKE: First Touch to Tax 2023/2024 - M Stiglingh et al  Taxation of individuals simplified: 2020 - KL de Hart et al  A Student’s Approach to Income Tax /Natural person 2020 - K Coetzee et al © University of the Witwatersrand 58 58  © University of the Witwatersrand 59 59 MB 2 60 60