1

LEARNING OUTCOMES AND ASSESSMENT CRITERIA

The content of this learning unit (“LU”) is based on the following learning outcomes and assessment criteria
of the module:

Learning outcome(s) Assessment criteria

1. Assess the tax profile of a taxpayer • Conclude on the legal form, business structure and
to determine the various taxes residence status of a taxpayer to determine the
payable by a taxpayer. types of taxes payable (e.g. value-added tax,
donations tax, estate duty, normal tax (including
capital gains tax), prepaid taxes, dividends tax,
withholding tax).
• Assess information needed to determine the
various tax liabilities, including
• the role-players in the tax landscape,
• the types of taxes and their interaction and
• the underlying principles of a tax system.
• Determine the various tax liabilities and to provide
reasons for the inclusion or exclusion of amounts.
• Interpret the tax treatment of a transaction with
reference to legislation, double tax agreements
and case law.
• Determine the taxation payable/refundable of
income in the Republic by non-residents.
2. Advise taxpayers on the tax effect of • Evaluate transactions to determine the effect on an
transactions, operations, schemes, individual or corporate taxpayer’s tax liability.
agreements or events and calculate • Determine the tax consequences of emigrating
the tax consequences thereof, taking
into account the various taxes from the Republic (e.g. deemed disposals) or
payable. immigrating to the Republic of South Africa.
3. Advise on specific tax and financial • Assess the normal tax and VAT consequences for
planning opportunities for individuals the business and the investor of the investment
as well as for business entities. and financial planning tactics being considered
and advise the taxpayer on possible alternatives.
• Reflect on the tax consequences of shifting income
between connected persons by making use of
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Learning outcome(s) Assessment criteria

donations, interest free loans and trusts (e.g.
section 7 and the attribution rules) or entities (e.g.
tax avoidance rules).
• Critique the available options for a specific
decision-making situation to establish the most
suitable option and compose a suitable response
of the information to the taxpayer if within the field
of speciality or refer to an appropriate expert if
necessary.

STUDY PROGRAMME AND TIME FRAME

A total of 18 hours of your study time is allocated to LU 6.

Your time should be divided between two aspects:
• Obtaining the required knowledge
This entails working through this LU and the textbooks (SAICA Student Handbook and
SILKE), underlining, making summaries and familiarising yourself with capital gains tax,
including the determination of taxable capital gains and assessed capital losses.
• Application of knowledge
This entails the completion of the examples and integrated activities included in this LU.
Please note that the integrated activities will not only cover LU 6 but will also integrate
your knowledge obtained during your undergraduate studies and in LU 1 to 5. It will
provide you with an opportunity to revise your prior knowledge, identify areas for further
study and will test your decision making and integrated thinking skills. Included in these
activities you will find prior year assessment questions which should provide you with an
opportunity to evaluate whether your knowledge is on the desired level and if you have
met the outcomes and assessment criteria set at the start of this LU.
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The following time allocation is recommended:

Capital gains tax Minutes

Learning outcomes and assessment criteria 5

6.1 Background 10
6.2 Beancounter scenario 5
6.3 Content of learning unit 5
6.4 Important law amendments 10
6.5 Additional notes to this learning unit
6.5.1 Part I and II of the Eighth Schedule (par 1 – 10) (including
Activity 6.1 (20 minutes)) 50
6.5.2 Part III of the Eighth Schedule – disposal of assets (par 11 –
14) (including Activity 6.2 (15 minutes)) 110
6.5.3 Part IV of the Eighth Schedule – limitation of losses (par 15, 53
and 56) 30
6.5.4 Part V of the Eighth Schedule – base cost (par 20 – 34)
(including Activities 6.3 and 6.4 (20 minutes)) 70
6.5.5 Part VI of the Eighth Schedule – proceeds (par 35 – 43A)
(including Activity 6.5 (30 minutes)) 45
6.5.6 Part VII of the Eighth Schedule – primary residence exclusion
(par 44 – 50) (including Activity 6.6 (25 minutes)) 60
6.5.7 Part VIII of the Eighth Schedule – other exclusions (par 52 –
64B) 30
6.5.8 Part IX of the Eighth Schedule – roll-overs (par 65 – 66), s 9HB 30
6.5.9 Parts dealt with in later LU’s
6.6 Outcomes of the Beancounter scenario – discussion activity 15
6.7 Summary of LU 6 5
6.8 Integrated activities 6.7 to 6.13 600
Total (18 hours) 1080

Note that there is a lot of work to master in the allocated time, however you have covered
all facets of capital gains tax in your undergraduate studies. The level of detail in which you
covered the paragraphs of the Eighth Schedule might have differed, as well as the depth of
the application of the knowledge obtained to practical scenarios. During your studies this
year, we will stretch your decision making- and critical thinking skills with the types of
questions, as well as the integration of your knowledge of the various tax topics. To facilitate
this process, the time in this LU will be allocated to additional notes and activities to deepen
your understanding of difficult concepts. Where necessary, you will have to refresh your
memory regarding sections and paragraphs you already covered in your prior studies in
your own time.
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6.1 BACKGROUND

The first thing to remember is that capital gains tax is not a separate tax and reference to "capital gains
tax (CGT)" in textbooks and notes (also in these notes) is for practical purposes only. CGT should be
understood in the context of the Eighth Schedule to the Income Tax 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 of a person.

CGT became effective from 1 October 2001 and deals with the disposal of assets on or after the valuation
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. The first basic principle of the calculation of CGT is to determine the amount
of the capital gain or loss by subtracting the base cost from the proceeds for every asset disposed of.

From the wording of the above paragraph, four key definitions contained in the Eighth Schedule can be
identified. 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 LU’s. 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 - 10C, 12T)
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 are shown in the CGT process flow chart in SILKE 17.5.
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6.1.1 UNGC Principle 10

The UNGC principles were introduced in LU 2. Compliance with the laws and regulations is the basis on
which the taxation legislation is founded.

UNGC principle 10 states that businesses should work against corruption in all its forms, including extortion
and bribery. The definition of corruption includes dishonest or fraudulent conduct. Tax evasion would fall
within the ambit of corruption. Taxpayers must always keep in mind that when an asset is disposed of, the
nature of the disposal can either be revenue or capital. It the disposal is in fact revenue in nature, the
amount received should be added to the gross income of the taxpayer.

It is important to take note of the UNGC principle 10 not only when studying, but more importantly when
applying the CGT principles as entailed in the Eighth Schedule. This means that if an asset is sold, it
cannot simply be ignored when doing your tax calculation. You need to be able to calculate the correct
aggregate capital gain and/or loss and include it in your taxable income. It also needs to be declared on
your annual tax assessment.

6.2 BEANCOUNTER SCENARIO

Before you start studying the detailed provisions of the Income Tax Act, read the
following scenario relating to the Beancounter family or watch the video. The scenario
requires you to read through the information provided. As you study the different
income tax provisions relating to CGT, you should analyse areas of concern that
should be brought to the attention of the Beancounter family and the impact thereof
on their taxes due.

Barry and Bizzie Beancounter (married in community of property) own a primary residence and Barry owns
a beach cottage. He inherited the beach cottage from Exotic, who died on 10 March 2023. As you already
know, Exotic did not like Bizzie and she put a clause in her will that this beach cottage would be excluded
from their joint estate.

Barry donated the beach cottage to his son Soya (who immigrated to Spain in 2017) on
30 September 2023. 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 2023.

Exotic purchased the beach cottage on 10 January 2003 for R600 000. On the date of Exotic's death, the
beach cottage had a market value of R1 200 000. For the past six years a net annual rental income of
R24 000 has been received from letting the beach cottage.

On 30 September 2023 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 2002 for the amount of R1 200 000 (inclusive of
transfer duty). In June 2010 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 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 2023, 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 you to reflect on the information provided to you and assess whether there will be any
donations tax payable or a possible taxable capital gain as result of the above transactions.
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Discussion Activity

Before attempting to help Barry with his queries, work through and master LU 6. Only
then will you be ready to address Barry’s queries and you can share this on
Discussion Forum 6.1. The outcomes (solution) for the Beancounter scenario will be
made available during your study week for this Topic.

6.3 CONTENT OF LEARNING UNIT 6

6.3.1 Study approach
In this LU, we will provide you with a Table of Reference for each part of the Eighth Schedule as it is a
long LU. Refer to LU 4, note 4.3 for an outline of the study approach followed for Topic 2.

We will enhance your understanding of some concepts with activities in the LU. The time provided for each
activity (question or example) is calculated as 6 minutes per page of reading time for each activity,
1.5 minute for every mark and then 6 minutes per page of the solution, for you to review your answer
against the solution provided.

6.4 IMPORTANT LAW AMENDMENTS

Before continuing with LU 6, take note of the following amendment to the Income Tax Act, which is
contained in the Taxation Laws Amendment Act 17 of 2023. Certain amendments that were enacted in
the prior year’s Taxation Laws Amendment Act 20 of 2022 are also summarised for your reference.

Law amendments enacted by the Taxation Laws Amendment Act 17 of 2023:

Par 12A(6)(d) Concession or compromise in respect of a debt

There are certain situations where the debt concession or compromise

provisions provided for in par 12A (and section 19) will not apply to a
debt benefit. One of these situations is if a debt that is waived, is owed
by a person to another company in the same group and the company
(referred to as the dormant company) owing the debt has not carried
on a trade in the current or previous year of assessment (par 12A(6)(d)).
The dormant company exclusion will however not apply to a debt
• used to fund an asset that was disposed of, before or after that
debt benefit arises, in terms of a corporate reorganisation
transaction (as part of an asset-for-share, amalgamation,
intragroup transaction or a liquidation distribution under ss 42,
44, 45 or 47 respectively (see Topic 5)), or
• that was incurred by the dormant company to refinance another
debt owed between companies that form part of the same group
of companies.
The amendment clarified when the dormant company exclusion will not
apply to a specific debt by clarifying the timing of the disposal of the
asset in relation to the debt benefit. It firstly clarified that for corporate
reorganisation transactions the asset could be disposed of before or
after the debt benefit arose (previously it only referred to assets
disposed of after the debt benefit arises) for the dormant company
exclusion to not apply.
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Law amendments enacted by the Taxation Laws Amendment Act 17 of 2023:

It further clarified that for years of assessment commencing from

1 January 2024, if this debt benefit arises at any time before the
disposal of the asset, the debt benefit must be treated as if it occurred
immediately before the date of disposal.
Par 64B(1)(b) Disposal of equity shares in foreign companies

Paragraph 64B(1) disregards the capital gain or loss on the disposal of

foreign equity shares by a resident provided certain requirements are
met, this exemption is known as the general participation exemption.
This exemption will not apply if a person disposes of foreign equity
shares to:
i. a controlled foreign company (CFC) or a connected person in
relation to the person disposing of the shares;
ii. a non-resident company that formed part of the same group
of companies as the company disposing of the shares at
any time during the 18 months before that disposal; or
iii. a non-resident company of which the shareholders,
immediately after the disposal, are substantially the same
as the shareholders of any company in the group of
companies disposing of the shares (s 64B(1)(b)(i) – (b)(iii)).
The main aim of the exemption of the capital gain or loss on the sale of
foreign equity shares by residents, is to encourage the reinvestment in
South Africa of the proceeds on the disposal of the shares in foreign
companies to non-connected non-residents. Two additional exclusions
(ii and iii) from the participation exemption, have been added to the
section, effective from 1 November 2023 and is applicable to any
disposals from that date. These additional exclusions have been
included to assist in curbing the unintended application (misuse) of this
general participation exemption.
Par 66(1)(a), Reinvestment in replacement assets
(1)(c) & (4)
In the case of a disposal of an asset, the taxpayer can elect that par 66
of the Eighth Schedule should apply if reinvesting in a replacement
asset and if certain requirements are met. If elected, section 8(4)(e) and
par 66 will provide for a delayed taxation of the recoupment (see SILKE
par 13.10.3) and the capital gain on the asset sold in proportion to the
capital allowances claimed on the replacement asset (par 66(4)).
Effective from 1 March 2023, the election of par 66 will also be available
for movable assets used in the generation of renewable energy, where
allowances were claimed under section 12BA (see Topic 3). This
proviso is also explained in par 17.10.3.2 in SILKE and its application
will be discussed in detail in Topic 3.
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Law amendments enacted by the Taxation Laws Amendment Act 20 of 2022:

Par 5 Annual exclusion

A proviso has been added to par 5(1) that provides that where any
person’s year of assessment is less than a period of 12 months, the
total annual exclusions for years of assessments during the period of
12 months commencing in March and ending at the end of February
the immediately following calendar year must not exceed R40 000 (for
example when a person emigrates and there will be two years of
assessment in a twelve month tax period).

This proviso applies with effect from 1 March 2023 and will affect an
individual’s 2024 year of assessment. This proviso is also explained in
par 17.5 in SILKE.

Use the following link to access to the newly published Acts:

https://www.sars.gov.za/legal-counsel/primary-legislation/amendment-acts/

6.5 ADDITIONAL NOTES TO LEARNING UNIT 6

6.5.1 PARTS I AND II OF THE EIGHTH SCHEDULE

• Read the applicable paragraphs in the Eighth Schedule to the Income Tax Act as
indicated in the table below.
• Revise the paragraphs in SILKE (as indicated below) and read through any notes
provided. You would have covered some of these paragraphs already in previous LU’s
(for example SILKE par 17.3.3 covering withholding tax on the disposal of immovable
property by non-residents covered in LU 5) and only need to revise the content if you
lack understanding of the topic.

Legislation
8th
Schedule Reference Notes
Application Examinable
(All to SILKE in LU 6
covered in
undergrad)
par 1 17.1, 17.2, Definitions and scope 6.5.1 Yes
17.4 & 17.6
(excluding Value Shifting Agreement) No
par 2 17.3 Application (persons liable for CGT) Yes
par 3 – 10 17.5 Capital gain and assessed capital losses 6.5.1 Yes
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All examples in SILKE chapter 17 are based on the assumption that the receipt or accrual is
of a capital nature and therefore not gross income as defined.

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". It also includes crypto currency.

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. Remember that the gain or loss of every asset needs to be determined separately.
When trading stock is sold, the amount received will be gross income in terms of the definition in the
Income Tax Act, but also proceeds in terms of the definition in the Eighth Schedule. When calculating
proceeds, 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 Income Tax Act.
In terms of paragraph 20 of the Eighth Schedule, the base cost of trading stock will be the cost of acqui-
sition, 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 Income Tax 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 the same time,
a deemed acquisition takes place (which will also be taken into account for the purposes of section 22 of
the Income Tax Act (the trading stock valuation section)).

Activity 6.1 (20 minutes)

To better grasp the interaction between the normal tax framework and CGT, work through
Example 6.1 and Example 6.2
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Example 6.1:
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
Income Tax 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 (2 000)
35(3)(a))

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

Example 6.2:
Recoupment of an asset

Facts: All amounts exclude VAT and paragraphs 65 and 66 of the Eighth Schedule (roll-over provisions)
(refer to Topic 3 for more extensive examples) are not applicable. The cost price of a second-hand machine
was R100 000. Section 12C allowances in terms of the Income Tax 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, a portion of the amount received will be a recoupment in
terms of section 8(4)(a) of the Act. So:
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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  (20 000)
(20% x R100 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

Remember:
1. 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.
2. 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. From 1 March
2023 this exclusion is apportioned when the individual emigrates.
3. A capital loss is reduced by the annual exclusion before it will be carried forward to the
next year of assessment.
4. 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 17.3.2) 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
Income Tax Act – refer to LU 5. This withholding tax is a prepayment of the non-resident's
normal tax and must be withheld by the purchaser.
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6.5.2 PART III OF THE EIGHTH SCHEDULE – DISPOSAL OF ASSETS

• Read the applicable paragraphs in the Eighth Schedule to the Income Tax Act as indicated
in the table of reference below.
• Revise SILKE (as indicated below) and read through the notes provided.

Legislation Reference Application Notes in Examinable

8th to SILKE LU
Schedule/section
(All covered in
undergrad)
par 11 17.7, 17.7.1, Disposals and non-disposals 6.5.2 Yes
17.7.2
par 12, 12A & s 9H 17.7.3 Events treated as disposals and 6.5.2, Yes
which was covered 17.8.4, acquisitions 6.5.5
in LU 5 13.10.8 (excluding par 12A(5)) LU 5 No

s 9K Listing of security on exchange No

outside Republic
par 13 17.7.4 Time of disposal 6.5.2 Yes
par 14 17.7.5 Persons married in community of
property 6.5.2 Yes

Interpretation Notes are not included in the SAICA Student Handbook, but to the extent that an
Interpretation Note creates a practice generally prevailing (refer to section 5 of the Tax Administration
Act), the relevant extract will be provided in the test or examination.

The following Interpretation Note relates to the concession or compromise of a debt:

Interpretation Notes are available at: Interpretation Notes | South African Revenue
Service (sars.gov.za)

Interpretation Note:
Interpretation Note: No. 91 (Issue 2). Date: 20 July 2022 - Concession or compromise of a debt
(par 12A)

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 Income Tax 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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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 17.7.2).

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
Income Tax 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 Topic 3. Revisit the commentary on the Natal Estates
case in the Case Law Guide Chapter 2.

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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Activity 6.2 (15 minutes)

Work through Example 6.3 (personal-use assets) and Example 6.4 (change of intention) to
enhance your understanding of the topics covered.

Example 6.3:
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 2023.

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 two 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 XXX
Less: Section 11(e) (R8 000/2) (4 000)
Add: Taxable capital gain nil
 15

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

Example 6.4:
Change of intention – capital asset to trading stock

Facts: Mr F bought a farm for R5 000 000 on 10 January 2012. The farm was used for farming purposes
and all produce was exported. Because of drought, 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 retirement villa. Mr F 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 5%
that he is currently earning. The development will start in January 2024 (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 2024. Assume that Mr F 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 2024.

Result: A deemed disposal of an asset took place. The provisions of the Eighth Schedule must be applied.

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 Income Tax Act
could also be applicable.

• Debt benefit and paragraph 12A – also refer to part iv of the 8th Schedule below, SILKE 17.8.4,
13.10.8 and Topic 3

This is a uniform debt relief system that comes into operation through section 19 of the Income Tax Act,
but it also has a CGT effect, which is mainly contained in paragraph 12A of the Eighth Schedule. See the
diagram in SILKE 17.8.4 to determine if there is a CGT consequence in respect of the debt. Section 19
(see SILKE chapter 13.10.8) is dealt with in detail in Topic 3. However, you must have a basic
understanding of par 12A of the Eighth Schedule (SILKE 17.8.4).
 16

Eighth Summary and application of paragraph 12A and s 19 SILKE

Schedule
12A If the purchase of either an asset (other than an allowance asset) or an 17.8.4
Debt relief allowance asset was funded by a debt and the debt is consequently reduced
or debt by the creditor, the reduction amount (in the hands of the debtor) is applied
benefit as follows and in the following order:

• Asset (non-allowance asset)

o Debt benefit applied to reduce base cost (par 12A)
o Asset disposed of in year prior to when debt benefit arises:
o Difference between the recalculated capital gain or loss
(taking into account prior debt benefits) and actual capital gain
or loss on disposal included as capital gain in year when debt
benefit arises (par 12A)

• Allowance asset
o Debt benefit applied to reduce base cost of allowance asset
(par 12A)
o Excess of debt benefit recouped under s 19(6) and s 8(4)(a)
o Asset disposed of in year prior to when debt benefit arises:
o Difference between the actual recoupment on disposal and
the recoupment if the debt benefit was taken into account
when calculating this recoupment will be taxed as a
recoupment under s 19(6A) and s 8(4)(a)
o Difference between the recalculated capital gain or loss
(taking into account prior debt benefits) and actual capital gain
or loss on disposal included as capital gain in year when debt
benefit arises (par 12A)

• Refer to the flow diagram in SILKE 17.8.4.

• See examples 17.15 and 17.16 in SILKE (Examples 17.17 and 17.18 will
be discussed in Topic 3).
• 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.

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 can revisit and study any
paragraphs you are not comfortable with in SILKE 17.7.4.

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 Topic 5.

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.
 17

6.5.3 PART IV OF THE EIGHTH SCHEDULE – LIMITATION OF LOSSES

• Read the applicable paragraphs in the Eighth Schedule to the Income Tax Act as indicated
in the table below.
• Work through SILKE and revisit those paragraphs you are not yet comfortable with (as
indicated below) and the notes provided.
• Note that although reference is made to paragraph 39 in the note below, it will be addressed
in more detail under note 6.5.5.
• Revisit the definition of a connected person in section 1 of the Income Tax Act.

Legislation Reference to Application Notes in Examinable

8th Schedule SILKE LU 6
(All covered
in
undergrad)
par 53 17.10.2, Personal-use assets 6.5.2 Yes

par 15 17.10.5 Certain personal-use assets Yes

17.10.5.1
par 19 17.10.5.5 Losses on disposal of certain shares No
par 37 17.10.5.6 Assets of trusts and companies No
par 56 17.10.5.8 Disposal by a creditor of debt owed by a
connected person 6.5.2 Yes

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 the link between these paragraphs. The differences between and the
application of these paragraphs are summarised in the table below:

Eighth Summary and application SILKE

Schedule
Par 56 • When a creditor disposes (includes the waiver or cancellation of that 17.10.5.8
Losses 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.
• See examples 17.60 and 17.61 in SILKE if you want to review the
practical application of the paragraph.
Par 39 • This paragraph ring-fences a capital loss between connected 17.10.5.7
Clogged persons. Such losses may only be offset against future capital gains
losses 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.
• See example 17.59 in SILKE for an example of a disposal to a
connected person.
 18

Eighth Summary and application SILKE

Schedule
Par 20(3) • This paragraph is only applicable if the base cost of the asset is 17.8.3
Base cost 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 17.14 in SILKE if you want to review the practical
application of the paragraph.
• Par 20(3) applies to the buyer of the asset.
35(3)(b) • If for some reason the selling price of an asset is reduced, the seller 17.9.1
Proceeds of the asset must reduce the "proceeds" of this asset by that amount.
• See example 17.39 in SILKE if you want to review the practical
application of the paragraph.
• Par 35(3)(b) applies to the seller of the asset.

6.5.4 PART V OF THE EIGHTH SCHEDULE – BASE COST

• Read the applicable paragraphs in the Eighth Schedule to the Income Tax Act as
indicated in the table below. Work through SILKE and revisit those paragraphs you are
not yet comfortable with (as indicated below) and any notes provided.
• Ignore notes on controlled foreign companies. Section 8C in SILKE 17.8.1 will be
covered under Topic 4.

Legislation Reference to Application Notes Examinable

8th Schedule SILKE in LU6
(All covered
in
undergrad)
par 20 & 17.8, 17.8.1, Base cost of an asset 6.5.4 Yes
s 23C 17.8.2, 17.8.3,
17.8.4 and 6.5.3
17.8.5
par 20A Provisions relating to farming development - No
expenditure
par 21 17.8.6 Limitation of expenditure - Yes
par 22 17.8.7 Amount of donations tax included in base 6.5.4 Yes
cost
par 23 17.12.1 Value-shifting arrangement – par 1 definition - No
base cost formula in par 23
par 24 17.8.8 Base cost of an asset of an immigrant - No
par 25(1), 26 17.8.9 Base cost of pre-valuation date assets - No
& 27
par 25(2) & 17.13.2 Redetermination of pre-valuation assets No
(3)
par 28 17.8.10 Valuation date value of a section 24J instru- - No
ment
(market value will be provided)
par 29 17.8.11 Market value on valuation date - No
(market value will be provided)
par 30 17.8.12 Time-apportionment base cost ( TAB - - No
amounts will be provided, integration
remains important)
par 31 17.8.13 Market value of assets - Yes
(Market value will be provided)
 19

Legislation Reference to Application Notes Examinable

8th Schedule SILKE in LU6
(All covered
in
undergrad)
par 32 17.8.14 Base cost of identical assets - Yes
par 33 17.8.15 Part disposals - Yes
par 34 17.8.16 Debt substitution - Yes

The following Interpretation Note relates to the deduction of security expenditure:

Interpretation Notes are available at: Interpretation Notes | South African Revenue
Service (sars.gov.za)

Interpretation Note:
Interpretation Note: No. 45 (Issue 3). Date: 24 August 2018 - Deduction of security expenditure (par 20
& par 53)

Base cost of an asset – paragraph 20

Base cost consists of 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. If the asset was acquired on or after 1 October
2001, its base cost is determined 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.

Activity 6.3 (10 minutes)

To enhance your understanding of the calculation of the base cost, work through Example
6.5 and Example 6.6.
 20

Example 6.5:
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.

The following example (Example 6.6) has been taken from the SARS comprehensive CGT guide and
adjusted for amendments to the legislation:

Use the following link to access the comprehensive CGT guide:

https://www.sars.gov.za/lapd-cgt-g01-comprehensive-guide-to-capital-gains-tax/

Example 6.6:
Improvements reflected in state or nature of asset at date of disposal
(paragraph 20(1)(e))

Ms T acquires a second property at a cost of R300 000 in November 2009, 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 2012 she installed a jacuzzi in one of the bedrooms at a cost of R25 000. In October 2023, the jacuzzi
cracked and all the water leaked out. It was not worth repairing, so she had it removed.

Ms T'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. The jacuzzi is dealt with as a part disposal (see SILKE
17.8.15) in terms of par 33. The calculation of this will be the portion of the base cost of the house allocated
to the part disposed, using the ratio of the market value of the jacuzzi immediately before disposal relative
to the market value of the entire house.

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
 21

Activity 6.4 (10 minutes)

To enhance your understanding of paragraph 22, work through Example 6.7.

Example 6.7:
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 2010, 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 determine the capital gain (if any) for both me and my brother on the disposal of the asset to the
trust. Assume that the cumulative value of donations up to the date of current donation did not exceed R30
million and that no other donations arose other than mentioned in the question.

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)
Capital gain 1 000 000

Resident – block of flats

R
Proceeds 4 000 000
Less: Base cost R3 mil + (R4 mil – R3 mil/R4 mil x R780 000) - Par 22 (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 (immoveable 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.
 22

6.5.5 PART VI OF THE EIGHTH SCHEDULE – PROCEEDS

• Read the applicable paragraphs in the Eighth Schedule to the Act as indicated in the table
below.
• Work through SILKE and revisit those paragraphs you are not yet comfortable with (as
indicated below) and the notes provided.

Legislation
8th Notes
Reference
Schedule/section Application in LU Examinable
to SILKE
(All covered in 6
undergrad)
par 35 17.9, Proceeds (definition, inclusions and when 6.5.5 Yes
17.9.1 proceeds must be reduced)
par 35(2) Value shifting arrangement No
par 35A 17.9.2 Disposal of certain debt claims No
s 24M 17.9.3 Incurred and accrued amounts not quantified Topic Yes
3
par 36 17.11.5 Disposal of partnership assets No
par 37 17.10.5.6 Assets of trusts and companies No
par 38(1) & 17.9.5 Disposal and donations not at arm's length or 6.5.5 Yes
par 38(2)(e) to a connected person
par 38(2) Subsection link to s 8A, 8B, 10(1)(nE) & 37D No
that is excluded
par 39 17.10.5 Capital losses on disposals to connected 6.5.3 Yes
17.10.5.7 persons
par 39A 17.9.4 Disposal of asset for unaccrued amount of Yes
proceeds
par 40 Disposal to and from deceased estate – No
replaced by s 9HA –see below
par 41 Tax payable by heir of deceased estate No
s 9HA 17.11.4 Disposal by deceased person 6.5.5 Yes
27.3.2 Topic
4
s 9HB 17.10.3.3 Transfer of assets between spouses 6.5.8 Yes
s 25 17.11.4, Taxation of deceased estates 6.5.5 Yes
27.4 Topic
4
par 42 17.12.2 Short-term disposals and acquisitions of No
identical financial instruments
par 43 17.12.5 Transactions in foreign currency and Topic Yes
cryptocurrency 3
par 43(7) “local currency” par (b), (c) & (d) No
par 43A 17.12.3 Pre-sale dividends treated as proceeds No
par 43B 17.12.6 Base cost of assets of controlled foreign No
companies
 23

The following Interpretation Note relates to contingent liabilities assumed in the acquisition of a going
concern:

Interpretation Notes are available at: Interpretation Notes | South African Revenue
Service (sars.gov.za)

Interpretation Note:
Interpretation Note: No. 94. Date: 19 December 2016 - Contingent liabilities assumed in the acquisition
of a going concern (par 35(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.

Tax implications of a deceased person and a deceased estate (also refer to Topic 4)

The normal tax implications of deceased persons and estates are determined in terms of the provisions of
sections 9HA and 25 of the Income Tax Act. It is important that you understand the link between section
9HA and 25. Chapter 27 in SILKE has a detailed discussion and application of these sections and will be
further discussed in Topic 4. In this LU you need to have a basic understanding of section 9HA.

Activity 6.5 (30 minutes)

To clarify your understanding of the application of these two sections, work through this
basic example, Example 6.8.
 24

Example 6.8:
Normal tax (income tax and CGT) implications for a deceased person and deceased
estate

Mr Expire, who was married out of community of property, died on 5 January 2024, at the age of 60 years.

1. Mr Expire owned the following assets on the date of his death:

Market value on Base cost

date of death
R R
Primary residence 800 000 500 000
Holiday home 360 000 90 000
Shares in listed South African companies 400 000 280 000
Cash 400 000 400 000

Mr Expire's will provides for the following:

• His wife inherited the primary residence and R200 000 cash.
• He left his holiday house to his daughter.
• The executor of the estate had to sell the listed shares, and after paying all liabilities and costs, Mr
Expire’s daughter inherited the remainder of the estate.

2. The executor sold the listed shares for R500 000 and paid the following amounts/costs and liabilities:

R
• Costs (excluding executor's remuneration of R68 600 and master's fees of R600) 55 000
• Settling the bond on the holiday house 80 000
• Settling the bond on the primary residence 100 000

3. Mr Expire's wife will be responsible for any cash shortfall in the estate.
4. Mr Expire had no other taxable income up until the date of his death.

REQUIRED:
(a) Determine the capital gains tax implications for Mr Expire on the date of his death.

(b) Determine the taxable income of Mr Expire for the 2024 year of assessment. Until the date of his
death he received local dividends of R200 000 and a pension of R170 000 for the year of
assessment.

(c) Determine the capital gains tax implications for Mr Expire's estate.
 25

Suggested solution
R R
(a) CGT implications for Mr Expire

Primary residence (bequeathed to wife):

Proceeds (to spouse at base cost ito section 9HA(2)) 500 000
Less: Base cost (500 000) nil

Holiday home to daughter:

Proceeds (market value ito section 9HA(1)) 360 000
Less: Base cost (90 000) 270 000

Shares in listed companies (Note 1)

Proceeds 400 000 120 000
Less: Base cost (280 000) nil

Cash (currency not an asset for CGT)

Capital gain 390 000
Annual exclusion (par 5) (300 000)
Net capital gain 90 000
Taxable capital gain (40%) (par 10) 36 000

Note 1:
In Mr Expire's hands it is a deemed disposal of the assets at market value on date of
death (section 9HA(2)). The sale of the shares takes place in the estate. The proceeds
in the estate for CGT purposes will therefore be the selling price.
R R
(b) Income tax liability of Mr Expire
170 000
Pension
Local dividend 200 000
Less: Dividend (exempt section 10(1)(k)(i)) (200 000) nil
Taxable capital gain - see above 36 000
Taxable income 206 000

(c) CGT implications for the deceased estate

Primary residence to spouse:

Proceeds (section 25(3)(a)) 500 000
Less: Base cost (section 25(2)(b)) (500 000) nil

Holiday home to daughter:

Proceeds (section 25(3)(a)) 360 000
Less: Base cost (section 25(2)(a)) (360 000) nil

Shares in listed company:

Proceeds (selling price) 500 000
Less: Base cost (market value on date of death (s 25(2)(a)) (400 000) 100 000
Capital gain 100 000
Less: Annual exclusion (limited to R40 000) (par 5) (40 000)
Net capital gain 60 000
Taxable capital gain (40%) (par 10) 24 000
Note 2:
The liabilities incurred have no effect on the CGT calculation.
 26

6.5.6 PART VII OF THE EIGHTH SCHEDULE – PRIMARY RESIDENCE EXCLUSION

• Read the applicable paragraphs in the Eighth Schedule to the Income Tax Act as indicated
in the table below.
• Work through SILKE and revisit those paragraphs you are not yet comfortable with (as
indicated below) and the notes provided.

Legislation Reference Notes Examinable

8th to SILKE Application in LU 6
Schedule
(All covered
in
undergrad)
par 44 17.10.1 Definitions (with regard to primary residence 6.5.6 Yes
17.10.1.1 exclusions)
par 45 17.10.1 General principles 6.5.6 Yes
17.10.1.2
par 46 17.10.1.3 Size of residential property qualifying for 6.5.6 Yes
exclusion
par 47 17.10.1.3 Apportionment in respect of periods when 6.5.6 Yes
not ordinarily resident
par 48 17.10.1.3 Disposal and acquisition of primary 6.5.6 Yes
residence
par 49 17.10.1.3 Non-residential use 6.5.6 Yes
par 50 17.10.1.3 Rental periods 6.5.6 Yes
Par 51&51A 17.10.1.4 Transfer of residence from company or trust No
 27

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 AND
 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.

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. Par 47 to par 49 also applies for a spouse of that person or beneficiary.
 28

For example: it is possible that a taxpayer may buy a home and use it for, say, five 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.

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 by the natural person (or a spouse of that person or beneficiary). This
portion will be subject to CGT.

When a person disposes of a primary residence together with the land on which it is situated, the exclusion
of the capital gain or loss will apply only so much of the land as does not exceed two hectares.

Activity 6.6 (25 minutes)

To enhance your understanding of the application of the primary residence exclusion, work
through the following three examples (Example 6.9 to 6.11) which were adapted from the
SARS comprehensive guide to CGT (2020) (adapted for legislative amendments).

Example 6.9:
Primary residence

Mr D purchased a residence to be utilised solely as a primary residence on 1 October 2016 at a total cost
of R1 250 000. Seven years later (1 October 2023), Mr D sells this primary residence for R3 500 000 in
order to purchase another primary residence. Assuming Mr D pays income tax at the maximum marginal
rate of 45% 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 (par 5) (40 000)
Aggregate capital gain 210 000
Taxable capital gain (R210 000 x 40%) (par 10) 84 000
Tax payable (R84 000 x 45%) 37 800

The R2 million exclusion operates on a primary residence basis and not on a person holding an interest
in the primary residence basis.
 29

Example 6.10:
Spouses married in community of property

The facts are the same as for the above example, except that Mr D is married to Mrs D in community of
property and the primary residence falls within their joint estate. Assuming that Mrs D has no other capital
gains or losses in the year of assessment in question, Mr D and Mrs D’s taxable capital gains are
determined as follows:

Total Mr D Mrs D
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

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 or a spouse of that person or beneficiary 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 6.11:
Residence used partly for trade purposes and interrupted residence

Ms Y 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. Ms Y 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

Ms Y 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.
 30

6.5.7 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 17.10 (exclusions, roll-overs, attributions and limitations).
• Read the applicable paragraphs in the Eighth Schedule to the Income Tax Act as
indicated in the table below. Work through SILKE and revisit those paragraphs you are
not yet comfortable with (as indicated below) and the notes provided.
• Note that we already dealt with Part VII of the Eighth Schedule (primary residence
exclusion) in the previous note.

Legislation
8th
Notes
Schedule Reference
Application in Examinable
(All covered to SILKE
LU 6
in
undergrad)
par 52 17.10.2 General principles Yes

par 54 17.10.2, Lump-sum retirement benefits of a natural 6.5.7 Yes

Note 2 person
par 55 17.10.2, Long-term assurance policies 6.5.7 Yes
Note 3
par 57 17.10.2, Disposal of small business assets of a natural Yes
Note 4 person
par 57A 17.10.2, Disposal of micro business assets No
Note 5
par 58 17.10.2, Options exclusion Yes
Note 6
par 59 17.10.2, Compensation for personal injury, illness or Yes
Note 7 defamation
par 60 17.10.2, Gambling, games and competitions Yes
Note 8
par 61 17.10.2, Collective investment scheme in securities Yes
Note 9
par 62 17.10.2, Donations and bequests to public benefit Yes
Note 10 organisation (PBO)
par 63 17.10.2, Exempt persons Yes
Note 11
par 63A 17.10.2, Public benefit organisations No
Note 12
par 63B 17.10.2, Small business funding entities No
Note 13
par 64 17.10.2, Assets used to produce exempt income No
Note 14
par 64A 17.10.2, Awards under the Restitution of the Land Rights No
Note 15 Act
par 64B(1) 17.10.2, Disposal of equity shares in foreign company. Topic Yes
Note 16 5
par 64B(2-6) 17.10.2, Disposal of interest in equity share capital of No
Note 16 foreign co.
 31

Legislation
8th
Notes
Schedule Reference
Application in Examinable
(All covered to SILKE
LU 6
in
undergrad)
par 64C 17.10.2, Disposal of restricted equity instruments – only No
Note 17 linked to s 8C(4)(a))
Par 64D 17.10.2, Land donated in terms of land reform measures No
Note 18
Par 64E 17.10.2, Disposal by trust in terms of a share incentive No
Note 19 scheme

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.

6.5.8 PART IX OF THE EIGHTH SCHEDULE – ROLLOVERS

• Read the applicable paragraphs in the Eighth Schedule to the Income Tax Act, as well as
section 9HB, as indicated in the table below.
• Work through SILKE and revisit those paragraphs you are not yet comfortable with (as
indicated below) and the notes provided.

Legislation Reference Application Notes Examinable

8th to SILKE in
Schedule/section LU 6
(All covered in
undergrad)
Par 65 17.10.3, Involuntary disposal – Topic 3 Yes
17.10.3.1 Exclude par 65B
Par 65B 17.10.3.4 Disposals by recreational clubs No
Par 64E 17.10.2 Disposal by trust in term of share incentive
scheme No
Par 66 17.10.3.2 Reinvestment in replacement assets Topic 3 Yes

S 9HB 17.10.3.3 Transfer of asset between spouses 6.5.8 Yes

Par 67B, C & D 17.10.3.4 Share block companies, Mineral rights and No
Communication licence conversions
 32

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.

Section 9HB: Transfer of asset between spouses

In terms of section 9HB, 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 who transferred the property plus any subsequent qualifying costs
(paragraph 20). This provision is subject to the attribution rules (Trusts in Topic 5) in terms of part X in the
Eighth Schedule.

6.5.9 DEALT WITH IN LATER TOPICS

Part X: Attribution of capital gains (par 68 – 73) – with trusts (Topic 5)

Part XI: Company distributions (par 74 – 78) – with dividends (Topic 5)
Part XII: Trusts and trust beneficiaries (par 80 – 82) – with trusts (Topic 5)

6.6 SOLUTION OF THE BEANCOUNTER SCENARIO

Discussion activity
Read the Beancounter scenario again, or watch the video, and make a rough
summary of what your solution would be now that you have studied LU 6 on CGT.
Share your solution on the Discussion Forum 6.1, then refer to the solution that
will be made available during the study week for this LU. You need to review the
solution to improve your own understanding of the tax principles involved.
The more you actively participate in these discussion forums, the more your
communication skills will develop.
 33

6.7 SUMMARY OF LEARNING UNIT 6

This LU introduced you to the content in the CGT as set out in the Eighth Schedule of the Income
Tax Act as well as the relevant law amendments. A short table of reference was provided under every
part of the Eighth Schedule to guide you through the work. The Eighth Schedule was discussed
according to the sequential parts thereof. This ought to provide you with a well-rounded and
systematic knowledge base of the four key elements of a CGT event, exclusions, limitation of losses
and roll-overs applicable to the CGT calculation.

Ensure that you do not study CGT in isolation and that you consider the impact of CGT on all
applicable transactions. You are now ready to apply your knowledge of LU’s 4 to 6 by doing the
integrated activities below.

6.8 INTEGRATED ACTIVITIES 6.7 – 6.13

Below are seven activities for you to complete. Use these activities to assess your own knowledge,
competencies and take responsibility for your own learning experience. The activities will assist you to
identify shortcomings in your knowledge relating to Topic 2 and will also serve as a measure of your
understanding and ability to apply your tax knowledge obtained in practical situations.

ACTIVITY CONTENT MARKS/TIME

**

6.7 Discussion question on gross income, exempt income, calculation of 40/90

CGT

6.8 Integrated discussion question which includes VAT, the definition of 52/114
ordinary resident, donations tax, CGT and taxable income

6.9 Integrated discussion question that includes gross income, resident

vs non-resident, donations tax and CGT 49/110

6.10 Calculation of taxable income, CGT, trading stock, discussion of 20/60

withholding tax

6.11 Discussion of source rules, ceasing to be a resident and CGT 20/54

6.12 Discussion of gross income, source rules, withholding tax, and 20/66
calculation of taxable income

6.13 Calculation of donations tax, discussion of VAT, discussion on 40/102

resident vs non-resident

** The time provided for each question is calculated as 6 minutes of reading time for each activity, 1.5 minutes
for every mark and then 6 minutes per page of the solution, for you to review your answer against the solution
provided.
 34

PLEASE NOTE
The parts in the solutions that are highlighted in grey should not be studied as these
parts are excluded from the ITC Tax examinable pronouncements and are only
included for completeness sake.
Section 9C will be dealt with in your LU 9. Due to the integrated nature of the
questions in this LU, the parts relating to section 9C have not been removed.

ACTIVITY 6.7 (40 marks / 90 minutes)

A junior clerk at your audit firm has approached you regarding the normal tax implications stemming from
the information below. Ignore the calculation of VAT in answering the questions.

PART A – MR GEAR BOX 30 marks

Mr Gear Box, a salaried official employed in the diplomatic corps by the South African government, recently
inherited an old vintage Lincoln Zephyr (a motor vehicle) under the last will and testament of his aunt, who
died a few months earlier. This vehicle was in a spotless condition after his aunt’s husband had, in his own
words, "spent close to a fortune" overhauling it shortly before his own death. The vehicle was included at
its market value of R120 000 (at the date of her death) in the final liquidation and distribution account that
was drawn up by the executor of her estate. After driving it for a period of two weeks, Mr Box realised that
it would not make any sense to hang on to it as he already owned two other motor vehicles. He therefore
decided to dispose of this vehicle by advertising it in Junk Mail for R125 000. It was sold for this amount
within two days of placing the advertisement.

Mr Box's only other income during the 2024 year of assessment consisted of a monthly salary of R65 000,
local interest from a savings account (not a tax-free investment in terms of section 12T) in ABC Bank
amounting to R24 000, foreign interest from a fixed deposit amounting to the equivalent of R6 000 and a
royalty of R24 000, from a patent for which he had granted permission for its use in the Republic. He had
originally developed this patent in the United Kingdom (UK). Mr Box is a resident of the Republic, married
out of community of property and 60 years of age.

REQUIRED: Marks
(a) Briefly explain (by providing reasons and with reference to case law, where
applicable) whether it can be said that an "amount" has been received by or has
3
accrued to Mr Box with regard to the inheritance of the motor vehicle, as required
by the general definition of gross income. If so, show the amount.

(b) Determine the nature (capital or revenue) of the inheritance itself and show whether 2
the inheritance should, based on this, be included in Mr Box's gross income.
 35

ACTIVITY 6.7 (continued)

(c) Explain, supported by reference to case law where applicable, the nature of the
receipt of R125 000 arising on the disposal of the vintage vehicle and show whether
7
this amount should be included in the gross income of Mr Box.

(d) Critique whether the inheritance of the vehicle as well as its disposal will have any
capital gains tax implications for Mr Box. 3

(e) Conclude on whether Mr Box qualifies for any exemption in terms of section 10 of 3
the Income Tax Act in respect of the amounts listed above in the question and, if
so, show the amount.

(f) Briefly assess, supported by reference to case law where applicable, the tax
implications for Mr Box on the assumption that he is not a resident of the Republic
and that he rendered his services to the South African government outside the
borders of the Republic. He paid no foreign taxes on these services rendered.
Further assume that he has spent more than 183 days outside the Republic in the 12
preceding 12 months and that more than 60 of these days were consecutive. He
did not carry on any business through a permanent establishment in the Republic.
Ignore the implications of any double tax agreement.

PART B – MR TRIPPLE BLADE 10 marks

Mr Tripple Blade (a resident of the Republic) is one of your clients and he disposed of the following three
capital assets during the 2024 year of assessment:

• The primary residence of the Blade family, situated in Sea Point, Cape Town, that was sold to the
Blade Family Trust (a connected person) for its market value of R7.8 million on 29 February 2024.
Because of the cold and wet winters in Cape Town, which affected Mr Blade's health, he decided to
move back to Gauteng. This property was acquired by Mr Blade as a bequest from his spouse (they
were married out of community of property), who died on 1 December 2015. At that stage, this
property had a market value of R6.2 million, while the late Mrs Blade had originally acquired it at a
cost of R5.6 million on 1 April 2013. Some 8% of the total floor area of this property had, since its
original acquisition, been used by Mr Blade for the purposes of carrying on his business. From now
on, the trust will lease the full property out for residential purposes. The only improvement effected
to the property by Mr Blade since personally becoming the owner was a swimming pool, which was
added at a cost of R100 000. This swimming pool overlooks the Atlantic Ocean and is still one of the
main features of the property.

• A 12 m yacht, which he sold to his 25-year-old son, who has decided not to join the move to Gauteng
because of his love for the ocean. Mr Blade agreed to dispose of it for an amount equal to its current
market value (R500 000). This yacht had originally been acquired by Mr Blade for R800 000 and it
had always been used solely for the family's pleasure (i.e., not for any trade).

• 10 000 ordinary shares in Red Alert Ltd, which he acquired 3 years prior to its disposal. During the
period of holding these shares, the company never found itself in a position to declare or pay any
dividends to its shareholders; this was the main contributing factor to the disposal. The original cost
of the shares amounted to R200 000, while Mr Blade disposed of them for R175 000 to an
independent third party.
 36

ACTIVITY 6.7 (continued)

REQUIRED: Marks
Determine, supported by reasons where necessary, the amount of the taxable capital gain or
loss to be included in the taxable income of Mr Blade for the 2024 year of assessment.
Assume that he had no other disposals during the year, nor any assessed capital loss brought 10
forward from the previous year. All assets have been acquired after the valuation date. Ignore
any VAT..

(UNISA Test 2 2006 - adapted)

Remember that the parts in the solution that are highlighted in grey should not be studied as
these are excluded from the ITC Examinable pronouncements and only included for
completeness' sake.

ACTIVITY 6.7 – SUGGESTED SOLUTION

PART A

(a) The value of every form of property received by a taxpayer (and not only money) has to be included
as part of an "amount" in their gross income, provided it has a monetary value (Lategan v CIR).
So, as long as this property (in this case, the vehicle) has an ascertainable monetary value and
can be turned into money, it will constitute an "amount" for the purposes of the definition of gross
income (CIR v Delfos). Where the receipt (or accrual) is in a form other than money, it has to be
valued at the date of receipt or accrual (i.e., in this case the market value will have to be used
(R120 000) – Lace Proprietary Mines Ltd v CIR). (3)

(b) An inheritance would normally be considered to be a fortuitous gain and any "amount" received by
way of inheritance would therefore be capital in nature. The inheritance itself would therefore not
form part of gross income (neither covered by the general definition nor any special inclusion).(2)

(c) On receiving the inheritance (the vehicle), that asset will be capital in nature because of its
fortuitous nature. But consideration should also be given to the question whether a change of
intention took place before Mr Box disposed of it, as this would mean that its nature would change
to revenue. The mere fact that a taxpayer disposes of a capital asset at a profit does not in itself
indicate a change of intention. Something more is required to indicate that the taxpayer is engaged
in a scheme of profit-making (John Bell and Co (Pty) Ltd v SIR and Natal Estates Ltd v SIR). (2)

The following factors would tend to support the contention that the nature of the transaction is still
capital:
▪ Mr Box is a salaried employee (diplomat) and not a dealer in motor vehicles. (1)
▪ Mr Box held ownership in two other vehicles, meaning that he simply disposed of a superfluous
vehicle (and did not speculate with it). (1)
▪ The steps taken (by himself) and the cost to advertise the vehicle (in the Junk Mail) would also
support the fact that there was no change of intention. (1)
▪ Although the period of holding the asset was rather short, this factor in itself cannot indicate
an intention to speculate – there is no indication that he has ever traded with similar assets
and neither is there any indication that he has treated it as part of his trading stock. (1)
The nature of the receipt would therefore be capital and thus the receipt cannot form part of his
gross income. (1)
 37

ACTIVITY 6.7 – SUGGESTED SOLUTION (continued)

(d) The inheritance of the vehicle would simply establish the base cost (R120 000) of the capital asset,
while disposal of the vehicle would give rise to a capital gain of R5 000 (R125 000 – R120 000).
Although the proceeds do not form part of gross income (capital nature) (which means that it can
be subject to CGT), it would further qualify for an exclusion from CGT because it meets the
definition of a personal-use asset (paragraph 53 of the Eighth Schedule) – this vehicle was used
mainly for purposes other than the carrying on of a trade. There is thus no taxable capital gain
arising from the transaction. (3)

(e) The only exemption he qualifies for is the basic interest exemption provided for in section 10(1)(i).
As Mr Box is under 65 years old, a maximum exemption of R23 800 would be available to exempt
local interest from normal tax. (3)

(f) If Mr Box is a non-resident, he will only be taxed on amounts received or accrued in terms of the
source rules in section 9 and the relevant case law. Amounts of a capital nature will still be excluded
from gross income, except where these amounts are covered by special inclusions in gross income.

Neither the inheritance of the vehicle nor the disposal of the vehicle will constitute gross income as
both these amounts will be of a capital nature. In turn, the capital gain realised by the non-resident
will not be subject to CGT as it is not an asset in the Republic as defined in paragraphs 2(1)(b) and
2(2) of the Eighth Schedule. (2)

The source of services rendered will be determined by reference to the entity to which the services
are rendered. In this case, the services were rendered to the South African government outside
the Republic. Section 9(2)(h) would thus deem this income to be from a source within the Republic,
as it was for services rendered on behalf of the employers in the public sector and will constitute
gross income in his hands. (2)

This remuneration would normally be exempt from normal tax in terms of section 10(1)(o)(ii) as he
does meet the 183 days (i.e., he was outside the Republic for more than 183 days in the preceding
12-month period) and 60 days requirements, but the proviso to this section prescribes that this
exemption does not extend to amounts paid for services rendered for or on behalf of employers as
contemplated in section 9(2)(h). The full amount of R780 000 (R65 000 x 12) would therefore be
subject to normal tax in the Republic. (1)

As no tax was paid on this remuneration in the foreign country, section 10(1)(p) cannot apply.

In terms of section 9(2)(b), the source of interest income is determined by the residence of the
debtor (e.g., the financial institution in the Republic). In the case of Mr Box, the local interest from
the savings account (R24 000) will have its source in the Republic. (1)

Withholding tax on interest in terms of section 50B will not apply as he received it from a bank
institution. (1)

As he is a non-resident, section 10(1)(h) will exempt the full amount of interest from normal tax
because he was not physically present in the Republic for more than 183 days during the
12 months preceding the accrual of the interest income and neither did he carry on any business
through a permanent establishment in the Republic in the preceding 12 months. (2)

In terms of section 9(2)(d), the royalty income is from a South African source as it has been received
for the granting of permission to use the intellectual property in the Republic. The R24 000 will
therefore constitute gross income in his hands. (2)
 38

ACTIVITY 6.7 – SUGGESTED SOLUTION (continued)

If this is the case and the royalty is to be paid to a non-resident (which it is), the amount will be
subject to withholding tax at a rate of 15% of the gross royalty in terms of section 49B(1)(a). The
withholding tax is a final tax payable to SARS on the last day of the month following the month in
which it is paid. In turn, the full amount of the gross royalties received will be part of gross income
but will be exempt in terms of section 10(1)(l) as the requirements of section 49A have been fulfilled.
(2)
Total 31
Limited to 30
PART B
R R
Primary residence
Proceeds (par 35(1)) 7 800 000
Less: Base cost (par 20(1)(e))
- Original cost to first spouse (transfer between spouses, 5 600 000 (1)
section 9HB
- Improvement (par 20(1)(e)) 100 000 (5 700 000) (1)
2 100 000
Less: Adjustment for trade purposes (par 49)
- 8% x R2 100 000 (168 000) (1)
1 932 000
Less: Primary residence exclusion (R2 million limited to
gain/loss) (par 45) (1 932 000) (1)
nil
Add back: Non-residential portion 168 000 (1)
Capital gain relating to primary residence 168 000
Note: No adjustment to proceeds is necessary as they are equal to market
value (connected person).
Yacht R
Proceeds 500 000
Less: Base cost (800 000)
Capital loss (300 000) (1)
Note: No adjustment (to the proceeds) is necessary as the proceeds are equal to market
value (connected person). This yacht is excluded from a personal-use asset (longer
than 10 m), but the loss will be disallowed in terms of par 15 of the Eighth Schedule. (1)

Shares in Red Alert Ltd

Proceeds 175 000
Less: Base cost (200 000)
Capital loss (25 000) (1)

Summary
Primary residence - capital gain 168 000
Yacht - capital loss disregarded -
Shares in Red Alert Ltd - capital loss allowed (25 000)
143 000 (1)
Less: Annual exclusion (par 5(1)) (40 000) (1)
Aggregate capital gain 103 000

Taxable capital gain: 40% (par 10(a)) x R103 000 41 200 (1)
Total 11
Limited to 10
 39

ACTIVITY 6.8 (52 marks / 114 minutes)

Brian Technoso (40 years old) is a sole trader and registered as a category B vendor on the invoice basis
for VAT purposes. He has accounted for VAT on a 2-monthly basis (tax periods: February, April, June etc.)
since 2014. He is an IT specialist working as a consultant for various firms. In July 2023, his wife (they
were married out of community of property) divorced him on grounds of irreconcilable differences (he just
spent too much time on his work). In the divorce settlement (to which they both agreed) their primary
residence was allocated to her estate as a final settlement (they had no children). The primary residence
of the Technoso couple is situated in Durban. In July 2023, a sworn appraiser from Brian's bank valued
the residence at R3.8 million at no cost. This property was acquired by Brian on 1 May 2016 at a cost of
R2.2 million.

Brian had a 15-m yacht, which he sold during the 2024 year of assessment because he had no time to
use it. He had originally acquired this yacht for R3 000 000 and it had always been used solely for his own
relaxation (i.e. not for any trade). He received R2 160 000 from the sale. He did not sell any other assets
in the 2024 year of assessment.

In his spare time Brian developed a computer program that will prevent unauthorised people from logging
in on chat rooms.

In August 2023 he received an offer from an Armenian firm to join the firm as a consultant on a 2-year
contract (ignore any double tax agreement). Brian saw this as an ideal opportunity to expand his
knowledge to an international level, to find a buyer for his computer program as well as to provide for his
future retirement. He decided to accept the offer, but only for a 2-year period as he plans to return to
Durban (South Africa) to be a full-time pro surfer (he was very good at surfing as a teenager). On
31 August 2023, he decided to cease trading.

He compiled the following list of assets and liabilities as at 31 August 2023:

Assets and liabilities of Brian Technoso business enterprise:

Cost Open market
Note (excl VAT) value
Assets R R
Computers and printers (tax value on 31/08/2023: R45 000) 1
67 000 44 000
Office furniture (tax value on 31/08/2023: R10 000) 1 14 000 8 000
Sedan motor car (40% used for business purposes) 2 170 000 138 000
Money market account 3 - 49 500

Liabilities
Loan from Adam Technoso 4 - 60 000

Notes

1. Brian’s former brother-in-law (who is also an IT consultant) bought the computers and printers as
well as the office furniture at their open market value of R44 000 from Brian. These computers were
sold on the same date that Brian ceased trading.

2. Brian felt guilty that he neglected his former wife in all those years of marriage and subsequently
gave his car to her on 2 September 2023. He made no other donations in the 2024 year of
assessment.
 40

ACTIVITY 6.8 (continued)

3. Brian decided to keep his money market account at Investors Bank. It had a balance of R49 500 on
31 August 2023. He received interest of R3 724 on this account for the 2024 year of assessment.

4. In 2014 Brian’s father, Adam, lent him R60 000 interest-free to start his business. On 31 August 2023
Adam wrote off this amount as he felt that he would in any way be able to write it off as a capital loss
in his own accounting records.

Brian Technoso previously spent R80 000 of his own money on the patent development cost and
registration of his computer program but never claimed any of the patent development cost as a deduction
for income tax purposes (and will not do so in the 2024 year of assessment). On 1 December 2023 (after
he had deregistered for VAT purposes) he sold his computer patent to a British computer firm (the contract
was concluded in the United Kingdom) for a cash payment of R1.5 million (rand equivalent) and annuity
payments of R50 000 per year (first payment on 1 January 2024) for the rest of his life.

Brian’s other income during this year of assessment consisted of a net trading profit of
R180 000 from his business enterprise until 30 August 2023 (before the cessation of his business).

He received a monthly salary of R85 000 (correctly translated to South African rand) from
1 September 2023 from the Armenian firm.

During the 2024 year of assessment Brian only returned to South Africa from 10 December 2023 until
15 January 2024 (36 days) to attend his sister's wedding. He does not expect to return to South Africa until
the expiry of his contract with the Armenian firm.

REQUIRED: Marks
(a) Determine, supported with reasons, the VAT amount due by Brian Technoso to SARS
as a result of the cessation of his business enterprise. Assume that he incurred no 6
transactions other than the items mentioned in the question during the relevant tax
period.

(b) Reflect on (with reference to case law) whether Brian Technoso will be regarded as
ordinarily resident in the Republic in terms of the definition of resident in the Income 6
Tax Act 58 of 1962. (You do not have to discuss the physical presence test in the case
where a natural person is not ordinarily resident in the Republic.)

(c) Discuss and determine (if applicable) any donations tax implications when
Brian Technoso gave his car to his ex-wife. You may assume that Brian made no 6
previous donations during his lifetime.

(d) Discuss, with calculations, the capital gains tax (CGT) consequences regarding the
assets of Brian Technoso for the 2024 year of assessment. 18

(e) Determine the taxable income of Brian Technoso for the 2024 year of assessment. 12

(f) Briefly reflect on the CGT implications for Brian Technoso's ex-wife if she sold the
residence in Durban on 1 December 2023 for R3.2 million to enable her to buy a house 4
in a security complex. She paid an amount of 10% commission on the selling price to
the estate agent.
(UNISA 2008 – adapted)
 41

ACTIVITY 6.8 – SUGGESTED SOLUTION

(a) Calculation of VAT due on 31 August 2023

Deemed output tax R

Computers and printers (lower of cost or open market value = R44 000 x 15/115) 5 739 (2)
Office furniture (lower of cost or open market value = R8 000 x 15/115) 1 043 (1)
Sedan motor car (no deemed output – no input tax was claimed as it is a motor
car as defined) nil (1)
Money market account (money is not ‘goods’ as defined – no output tax payable)
nil (1)
Loan from Adam Technoso (not part of Adam's enterprise – no output tax payable)
nil (1)
6 782 6

(b) Ordinarily resident in the Republic

The term “ordinarily resident” is not defined in the Income Tax Act and we have to refer to case law in
this regard. (1)
In Cohen v CIR it was established that physical absence during the whole of the year of assessment
was not decisive of the question of ordinary residence. (1)

Brian’s ordinary residence would be in the country to which he would naturally and as a matter of
course return to from his wanderings (his usual or principal residence – his real home). (1)

In CIR v Kuttel it was made clear that a person's residence must be where they had their usual or
principal residence, what may be described as their real home. (1)

In the case of Brian Technoso, he will be absent from the Republic for a period of two years, but he
plans to return occasionally (to attend his sister's wedding). The temporary or occasional absences of
long or short duration will not affect his status as ordinarily resident. (1)

His intention is still to return after two years and to settle in Durban (South Africa). Brian will therefore
be ordinarily resident in South Africa. (1)
6

(c) Donations tax implications

Donations tax is payable on the fair market value of any property gratuitously disposed of by a South
African resident. (1)

Any donation made to or for the benefit of a spouse not separated or divorced from the donor will be
exempt from donations tax (section 56(1)(b)). Mr and Mrs Technoso’s divorce was finalised in
July 2023 and the donation was made on 2 September 2023. The exemption will not be available.
(1)

Brian is liable for the payment of donations tax by the end of the month following the month during
which the donation took effect, thus by 31 October 2023. (1)
 42

ACTIVITY 6.8 – SUGGESTED SOLUTION (continued)

Calculation of donations tax payable

R
Donation of sedan motor car @ market value 138 000 (1)
Less: Section 56(2)(b) – exemption (100 000) (1)
Amount subject to donations tax 38 000
Donations tax @ 20% 7 600 (1)
6

(d) CGT consequences

Primary residence
In terms of section 9HB where a person disposes of an asset to their spouse, any capital gain or loss
is disregarded. (1)
In terms of section 9HB, this is a roll-over which will also be allowed in the case of a divorce. (1)
There will thus be no CGT when the primary residence is allocated to his wife. (1)

Yacht
The yacht was a personal-use asset, but in terms of par 53(3)(d) a capital gain on a boat longer than
10 m will not be disregarded. (1)
In 2024 a capital loss of R840 000 (Proceeds of R2 160 000 less base cost of R3 000 000) was made.
(1)
The capital loss will, however, be disregarded in terms of paragraph 15(b) (1)
and there will be no capital loss carried forward to the 2025 year of assessment. (1)

Patent
No deduction in terms of the Income Tax Act had been allowed and no deduction from the base cost
in terms of par 20(3)(a) will be made. (1)
Capital gain
R
Proceeds 1 500 000
Less: Base cost (80 000)
Capital gain 1 420 000

R1 420 000 capital gain must be included in his other capital gains and losses. (1)

Computer and printers

A capital gain or loss should be calculated in terms of the Eighth Schedule on an asset that has been
disposed of:
R
Proceeds: 100/115 x R44 000 38 261 (1)
Less: Base cost (R67 000 – R22 000)  paragraph 20(3)(a) (45 000) (1)
Capital loss (6 739)

 The base cost of an asset should be reduced by expenditure already allowed as a deduction for
income tax purposes. Wear and tear of R22 000 (R67 000 – R45 000) has been claimed as a
deduction in terms of section 11(e).

A capital loss will be included in the calculation of his aggregate capital gain or assessed capital loss
. (1)
Note: Section 11(o) will not be allowed as this is a cessation of a business. (1)
 43

ACTIVITY 6.8 – SUGGESTED SOLUTION (continued)

Office furniture

A capital gain or loss should be calculated in terms of the Eighth Schedule:

R
Proceeds: 100/115 x R8 000 6 957 (1)
Less: Base cost (R14 000 – R4 000)  paragraph 20(3)(a) (10 000) (1)
Capital loss (3 043)

 Wear and tear of R4 000 (R14 000 – R10 000) has been claimed in terms of section 11(e).
The capital loss will be included in the calculation of his aggregate capital gain or assessed capital
loss.

Note: Capital losses – connected persons

Paragraph 39 of the Eighth Schedule is not applicable because his ex-brother-in-law is not
a connected person (in terms of paragraph 39(3)(a)).

Motor vehicle
It is a personal-use asset and in terms of paragraph 53, the capital gain or loss must be disregarded.
(1)
Money market account
His money market account is not a deemed disposal as he does not emigrate. (1)

Loan
The original loan was not originally used to fund an asset, thus paragraph 12A cannot apply. However,
it can be seen as a deemed donation by his father and, as such, donations tax will be levied in the
hands of the donor. Section 19 does not apply if the debt is reduced by way of a donation (section
19(8)(b)(i)). (2)
Total 19
Limited to 18

(e) Calculation of the taxable income of Brian Technoso for the 2024 year of assessment

R
Net trading profit 180 000 (1)
Interest received 3 724
Less: Exemption section 10(1)(i) (3 724) (1)
Salary (R85 000 x 6) 510 000 (1)
Exemption s 10(1)(o)(ii) longer than 183 full days in any 12-month period
as well as a continuous period exceeding 60 full days and less than (1)
R1.25 million (510 000)
Annuity 50 000 (1)
230 000
Section 26A – taxable capital gain (see calculation) 548 087 (1)
Taxable income 778 087
 44

ACTIVITY 6.8 – SUGGESTED SOLUTION (continued)

CGT calculation
R
Computers and printers* (6 739) (1)
Office furniture* (3 043) (1)
Sedan motor car – personal-use asset (par 53(3)) – excluded nil
Patent 1 420 000 (1)
Loan from Adam Technoso – no deemed disposal nil (1)
15-m yacht – personal-use asset (par 53(3)(d) and par 15) – capital
gain included but capital loss excluded nil (1)
Total capital gains 1 410 218
Less: Annual exclusion (par 5) (40 000) (1)
1 370 218
Included in taxable income @ 40% (par 10) 548 087 (1)
Total 13
Limited to 12

(f) Mrs Technoso - CGT implications

Mrs Technoso must account for CGT when she sells the primary residence. It is assumed that
she purchased the residence on the same date that Brian did and at the same base cost in terms
of section 9HB. (1)
R
Proceeds* 3 200 000 (1)
Less: Base cost (R1 200 000 + (R3 200 000 x 10%
(commission)) (1 520 000) (2)
Capital gain 1 680 000
Less: Primary residence exclusion (R2 million limited to actual) (1 680 000) (1)
Gain nil
Total 5
Limited to 4
 45

ACTIVITY 6.9 (49 marks / 110 minutes)

Malcolm Malefo (born in the Republic) is an unmarried 22-year-old up-and-coming soccer star. From
1 March 2023 until 30 April 2023, he played soccer full time for the Sundowns Strikers in Pretoria, earning
a gross salary of R24 000 per month. A talent scout from England saw him play in April 2023 and offered
him a contract to play in their Future Soccer Stars club in Manchester, England. They offered him a
lucrative 6-month contract of £25,000 (pounds) per month. If he fulfils his promise as a soccer star, they
will pay him an additional performance lump sum of £50,000 at the end of his 6-month term. He accepted
their offer and departed on 1 May 2023 to England. Assume Malcolm uses the average exchange rate for
the 2024 year of assessment of £1 = R20,00.

On 1 August 2023, he came back to South Africa to attend the funeral of his grandmother, who died on
31 July 2023. The funeral took place on 8 August 2023. To his surprise, he inherited her house in
Bryanston, Gauteng. He has never owned a house before and could not decide if he would like to use it
as his residence. His grandmother purchased this residence for R1 200 000 on 1 June 2005. In
August 2007 she renovated the kitchen area and added a patio. The cost of the renovations amounted to
R150 000 (VAT inclusive). On the date of her death, the residence was valued at R2 200 000 (the market
value). Malcolm signed a rental contract with Hirecor on 20 August 2023. Hirecor is an agency that collects
rentals on behalf of a number of property owners. From 1 September 2023 Hirecor rented out the house
at R8 000 per month and paid the net amount into his local bank account after deducting a 10% admini-
stration fee per month until he terminated his rental contract after five months on 30 January 2024.

During the period (1 August 2023 to 20 August 2023) that he was in South Africa, one of the coaches of
the Sundowns Strikers approached him with another deal. They proposed that he play three games for
the Sundowns Strikers team at R40 000 per appearance. The games would take place on 5, 7 and
9 November 2023. As it would not clash with his other commitments, he accepted.

Malcolm decided on 20 August 2023 (the day before his departure to England) to show ubuntu
(compassion and humanity) to his younger sister and donated all his old furniture and Toyota Corolla to
her. The furniture was worth R45 000 (he purchased it in 2014 for R70 000) and his Toyota Corolla had a
market value of R90 000 (original cost R140 000) on 20 August 2023.

After Malcolm successfully completed his contract with the Future Soccer Stars club (the additional
£50,000 was paid into his bank account on 1 November 2023), he returned to South Africa on
1 November 2023. He played the requested games for the Sundowns Strikers. Malcolm needed a holiday
and spent his time off in George, Western Cape from 1 December 2023 until 29 February 2024. Loving
this part of the country, he decided to sell the house in Bryanston and to buy a property in George.

On 30 January 2024 he terminated the rental contract and sold the Bryanston house on 31 January 2024
for R2 450 000 to Mrs Saxon (a resident in the Republic). He paid 3% sales commission on the gross
amount to the estate agent. On 1 February 2024, the estate agent paid the net amount into a newly opened
Republic money market account (it is not a tax-free investment account; assume the interest rate to be
7.25% compounded per annum). Until the end of February 2024, he could not find a property to his liking
in George.

He had no other assets except a collective investment scheme in securities in the Republic (he invested
a lump sum of R100 000 on 1 January 2024) and a savings account at the Bank of England. At the end of
the year of assessment local dividends of R4 200 as well as interest of R3 100 (from listed debt) accrued
from the CIS in securities and £1,300 interest accrued from the Bank of England (average exchange rate
for the 2024 year of assessment was £1 = R20,00).
 46

ACTIVITY 6.9 (continued)

REQUIRED: Marks
(a) Determine the South African taxable income arising out of the above
transactions for Malcolm Malefo for the 2024 year of assessment. Provide
reasons where the Eighth Schedule to the Income Tax Act is applicable but with 21
no effect on your calculations.
Assume that Malcolm Malefo is ordinarily resident in the Republic of South
Africa and ignore the implications of any double tax agreement.

(b) Discuss the normal tax implications for Malcolm Malefo for the 2024 year of
assessment on the assumption that he immigrates to Great Britain on 1 May
2023. Further assume that he did not carry on any business through a
19
permanent establishment in the Republic.
Your discussion should include any withholding taxes payable by the applicable
persons as well as the dates these taxes must be paid to SARS. Ignore the
implications of any double tax agreement.

(c) Determine any donations tax implications for Malcolm Malefo in respect of the
donation of the furniture and motor vehicle to his sister, or provide reasons if
there are no donations tax implications for him, where he 4
1) is a resident (as defined in section 1 of the Income Tax Act) of the Republic
2) is not a resident of the Republic
Assume that Malcolm Malefo made no other donations before the date of these
donations.

(d) In respect of the amounts received by Hirecor for the house in Bryanston,
evaluate, with specific reference to case law, whether these amounts constitute 5
gross income for Hirecor or not.

(UNISA 2009 – adapted)

Remember that the parts in the solution that are highlighted in grey should not be studied as
these are excluded from the ITC Examinable pronouncements and only included for
completeness' sake.
 47

ACTIVITY 6.9 – SUGGESTED SOLUTION

(a) Taxable income of Malcolm Malefo for the 2024 year of assessment

R R
Salary earned in SA (1/03/2023 to 30/04/2023) (R24 000 x 2 48 000 (1)
months)
Salary earned in England (1/05/2023 to 31/10/2023)
(£25,000 x 6 months x R20) 3 000 000 (2)
Foreign employment exemption s10(1)(o)(ii) (refer to note below) -
Rental income: residence in Bryanston:
R8 000 x 5 months = R40 000 40 000 (1)
Less: 10% admin fee of R40 000 x 10% = R4 000 (4 000) (1)
Appearance fee paid by Sundowns Strikers (R40 000 x 3 games) 120 000 (1)
Performance lump sum from Future Soccer Stars: £50,000 x R20 1 000 000 (1)
Foreign interest: £1,300 x R20 26 000 (1)
Local dividends 4 200
Exempt: section 10(1)(k)(i) (4 200) nil (1)
Interest on money market account: R2 450 000 less 3% =
R2 376 500 x 7.25% x 29/366 13 652 (2)
Interest: CIS in securities 3 100 (1)
Exempt: section 10(1)(i) (R23 800 limited to amount received) (16 752) (1)
Note: no exemption of foreign interest
Note: For section 10(1)(o)(ii) to apply, both (aa) and (bb) have to
apply. For (aa), an employee has to be outside RSA for more than
183 full days in aggregate during a 12-month period; and for (bb)
for a continuous period of more than 60 full days during that 12-
month period. Malcom was outside the country for 163 days (May
to October), which does not meet the more than 183 days
requirement.
Subtotal 4 230 000
CGT
Disposal of residence
Proceeds 2 450 000 (1)
Base cost (2 273 500)
- Market value on date of inheritance (s 9HA read with s 25(2)(a)) 2 200 000 (1)
- Sales commission paid (R2 450 000 x 3%) 73 500 (1)

No adjustment for the periods that the house was rented out as
set out in terms of par 50 of the Eighth Schedule will be allowed,
as Malcolm did not reside in the residence for at least one year nil (1)
before the rental contract was concluded.
 48

ACTIVITY 6.9 – SUGGESTED SOLUTION (continued)

R R
No primary residence exclusion – Malcolm did not use the house as
his primary residence – definition par 44 of the Eighth Schedule. nil (1)
Capital gain relating to residence 176 500
Assets donated
Furniture donated to sister – par 53 personal-use asset nil (½)
Motor vehicle donated to sister – par 53 personal-use asset nil (½)
Aggregate capital gain 176 500
Annual exclusion (par 5) (40 000) (1)
136 500
Inclusion rate 40% (par 10) x R136 500 54 600 (1)
Taxable income 4 284 600
21

(b) Normal tax implications – emigration

Malcolm Malefo becomes a non-resident on 1 May 2023, the date of emigration in terms of
section 9H(2)(b). (1)

 The physical presence test only applies to a person who is not ordinarily resident in the Republic
at any time during the year of assessment (Interpretation Note 4).
The physical presence test does not apply during the year of assessment that Malcolm Malefo
was still ordinarily resident in the Republic, i.e. from 1 March 2023 to 30 April 2023, being his
2024 year of assessment as resident (refer to s 9H(2)(b)).
The physical presence test can be applied from the next succeeding year of assessment, which
commences on the day Malcolm ceases to be a resident, i.e. from 1 May 2023 to
29 February 2024, thus his 2024 year of assessment as non-resident (refer to s 9H(2)(c)).

As from 1 May 2023 Malcolm Malefo will be a non-resident, so he will only be taxable on amounts received
or accrued from a source within the Republic in terms of section 9 of the Income Tax Act and in terms of
the gross income definition. (1)

The true source of services rendered is the place where they are rendered. Malcolm's salary (earned from
Sundowns Strikers) of R24 000 x 2 = R48 000 will be included as gross income in his 2024 year of
assessment as a resident (before emigration). (1)

The £25,000 (R500 000) per month earned as well as the lump sum of £50,000 (R1 000 000) from Future
Soccer Stars will be for services rendered in England, meaning that the actual source of his remuneration
is outside the Republic. He will not be taxed in the Republic (after emigration). (1)

The true source of rental income received on fixed property is where the fixed property is located. The
rental income of R36 000 (R40 000 – 10%) will be taxed in his hands in full, being from a source in the
Republic (located in Bryanston, Gauteng). (1)
 49

ACTIVITY 6.9 – SUGGESTED SOLUTION (continued)

The fees paid by Sundowns Strikers of R120 000 between 5 November 2023 and 9 November 2023 will
be taxed in terms of sections 47A to K, as Malcolm will be regarded as a foreign sportsperson.
As Malcolm is not an employee of a resident employer, section 47B will apply. A final tax of 15% should
be levied by Sundowns Strikers on the gross revenue of R120 000 (R40 000 x 3 games).

Sundowns Strikers must pay the 15% withholding tax to SARS by the end of the month following the month
in which it was paid, i.e. by 31 December 2023.
The R120 000 will be exempt in terms of section 10(1)(lA) as the provisions of sections 47A to K apply.

In terms of section 9(2)(b), the source of interest received is the tax residence of the debtor paying. As
the CIS is in South Africa, the source of the interest is South Africa. (1)
Section 50B levies a withholding tax on interest at 15% of the amount of interest that is paid to the non-
resident, provided that it is from a source within the Republic in terms of section 9(2)(b), unless it qualifies
for an exemption from withholding tax in terms of section 50D. Amounts subject to withholding tax will be
exempt in terms of section 10(1)(h). (2)

As Malcolm emigrated on 1 May 2023, and he was not physically present in the Republic for more than
183 days (276 days on 1 February 2024 outside of the Republic) in the previous 12 months, section 50D(3)
will not apply (so the interest is subject to the withholding tax) but the section 10(1)(h) exemption will apply.
(1)

Interest of R13 652 on the money market account will be exempt from withholding tax in terms of
section 50D(1)(a)(bb); thus no withholding tax on interest is applicable – the amount will also be exempt
in terms of section 10(1)(h). (1)

The foreign interest of £1,300 (R26 000) will not be from a source in the Republic in terms of section 9(2)(b)
and will not be taxed in the Republic. (1)

Local interest (R3 100) received from the CIS in securities will be included in his gross income in terms of
section 9(2)(b), but the interest will qualify for the section 10(1)(h) exemption after he has been out of the
country for more than 183 days (31 October 2023). (1)

The source of dividends received is, in terms of section 9(2)(a), the residence of the distributing company.
(1)
Local dividends (R4 200) received from the CIS in securities (conduit pipe for other resident companies)
will be included in his gross income (from a source in the Republic) but are exempt in terms of
section 10(1)(k)(i). Local dividends are subject to dividends tax of 20%. The CIS is an intermediary for
dividends tax and must withhold dividends tax on behalf of the unit holder. (1)

Capital gains tax

In terms of section 9H(2)(a)(i), there is a deemed disposal when a person ceases to be a resident and all
assets will be treated as a disposal at market value. (1)

Section 9H(2) and (3) does not apply in respect of assets listed in section 9H(4).
Malcolm's only other assets on date of emigration are his motor vehicle and furniture, which will be
excluded as personal-use assets in terms of par 53 of the Eighth Schedule. (1)

The residence sold is immovable property of a non-resident that is situated in the Republic. It will be a
disposal of an asset and CGT will have to be calculated (same calculation as in part a). (1)
 50

ACTIVITY 6.9 – SUGGESTED SOLUTION (continued)

However, section 35A (withholding of amounts from the payments to non-resident sellers of immovable
property) will apply. (1)

As the selling price exceeds R2 million (section 35A(14)(a) and therefore section 35A(1)(a) will apply) and
the seller is a natural person, the purchaser (Mrs Saxon or any other person on her behalf) must withhold
7.5% of the selling price of R2 450 000 (R183 750) and pay it over to SARS. (1)

As the purchaser (Mrs Saxon) is a resident, the withholding tax must be paid to SARS within 14 days of
it being withheld, i.e. by 14 February 2024 (section 35A(4)(a)). (1)

This tax is not a final tax but merely a prepayment of the normal tax liability of a non-resident (the seller
– Malcolm Malefo). (1)
Total 21
Limited to 19

(c) Donations tax implications

1) Resident
R
Furniture 45 000
Toyota 90 000
135 000 (1)
Less: Exemption (section 56(2)(b) (100 000) (1)
35 000
Rate (section 64) x 20% (1)
7 000
2) Non-resident

Donations tax is not applicable to non-residents. (1)

4
(d) Gross income for Hirecor

- The gross income definition, as given in section 1 of the Income Tax Act, is as follows: (1)

In the case of any resident, the total amount, in cash or otherwise, received by or accrued
to or in favour of such resident during any year or period of assessment, excluding
receipts or accruals of a capital nature.

- Hirecor received R8 000 per month for five months (R40 000) in respect of the house in
Bryanston, 10% (R4 000) of which related to an administration fee retained by them.
- The administration fee of R4 000 (R800 per month) was received by Hirecor on "its own
behalf and for its own benefit" (refer to Geldenhuys v CIR). (1)
- The balance of R36 000 (R7 200 per month) was received by Hirecor in the capacity of a
trustee (these amounts did not accrue to Hirecor as Hirecor was not unconditionally (1)
entitled to them) (refer to WH Lategan v CIR or CIR v Peoples Stores or Mooi v SIR), and
subsequently paid to Malcolm Malefo, who included the amount in his gross income.
Hirecor therefore did not receive the R36 000 (R7 200 per month) on its own behalf and for
its own benefit and will not include it in its gross income. (1)
Hirecor must therefore only include the R4 000 in its gross income as it was part of its
business venture and not of a capital nature. (1)
5
 51

ACTIVITY 6.10 (20 marks / 60 minutes)

Eddie Nkosi is a 47-year-old businessman and South African resident, providing financial advisory services
in Pretoria. Eddie married Julia Nkosi, a South African resident, on 4 January 2003. They are married out
of community of property. Eddie purchased his residence in Centurion, Pretoria on 1 July 2007 for
R2 200 000.

Eddie operated his financial advisory services practice from this residence. Approximately 20% of the floor
space of this residence is used for business purposes. Eddie claimed 20% of his home office expenses
against his business income for tax purposes.

During 2017, Eddie purchased a new family home in Waterkloof, Pretoria for R6 500 000. On 1 July 2017
(the date of transfer), they moved into their new home in Waterkloof. Eddie’s financial advisory service
practice was also moved to this premises on the same date.

Eddie entered into a lease agreement from 1 July 2017 to rent out the Centurion property for R12 000 per
month. A rental escalation of 5% per annum was negotiated. The escalation should be applied after each
12-month period. The rental on 30 June 2022 was R14 586.

The following expenses were incurred during the period 1 March 2023 to 30 June 2023 with regards to the
Centurion property, that was rented out:

Expense Amount
Water and electricity R10 000
Insurance R 4 800
Repairs and Maintenance R 8 000
Property rates R 9 600

On 1 July 2023 the Centurion property was sold at its market value of R4 000 000 and the rental contract
lapsed on 30 June 2023. Improvements to the amount of R500 000 were done on the Centurion property
for the period 1 July 2008 to 30 June 2023.

In order to pay for a lavish holiday in the Maldives, Eddie had to dispose of the following assets:

1. Eddie’s share portfolio for the 2024 year of assessment was as follows (all amounts in Rand or
Rand equivalent):

Listed Acquisi- No. of Cost MV per Selling No. of Selling

invest- tion date shares per share on date shares price per
ment purchased share 28/02/2023 sold share

(R) (R) (R)

Swatsh Ltd 01/12/2016 1 000 8.20 18.00

Swatsh Ltd 01/02/2021 3 000 12.80 18.00 01/12/2023 *2 000 16.00

*For identical assets, Eddie used the FIFO method to determine the cost of the assets
 52

ACTIVITY 6.10 (continued)

2. A platinum coin collection that was acquired on 1 September 2016 for R35 000. An amount of
R65 000 was paid on 15 November 2023 into Eddie’s bank account.
3. An Omega watch was sold on 15 October 2023 for R40 000. The watch was inherited from the
deceased estate of Eddie’s father on 1 July 2013. The market value on 1 July 2013 amounted to
R20 000.

REQUIRED Marks
(a) Determine the taxable income for Eddie Nkosi for the 2024 year of assessment.
Assume that he had a taxable income of R550 000 before taking into account
any information provided in the question and that his shares have been
acquired for speculative purposes. 14

(b) Assume that Eddie and his wife were non-residents and that the property
situated in Centurion was sold to a South African resident. Summarize,
supported with calculations and reference to relevant legislation, all the tax-
related matters arising from the sale transaction to the South African resident. 5
The actual capital gain/loss made, need not be discussed and calculated.

Communication skills – logical argument 1 6

Total 20
 53

ACTIVITY 6.10 – SUGGESTED SOLUTION

(a) Eddie Nkosi’s taxable income for the 2024 year of assessment

Calcula- Capital Taxable Marks

tions Gains Income
R R R
Taxable income before transactions Given 550 000
Rental income from Centurion property
Monthly rental (30 June 2022 rental + 5%) 14 586
Add: Annual escalation 5% (multiply by 1.05)
OR add R729,30 x 1.05 (1)
15 315
March 2023 to June 2023 = 4 months 15 315 x 4 61 260 (1)

Expenses from Centurion property - s 11(a) 32 400 (32 400)

• Water and electricity 10 000 (½)
• Insurance on building 4 800 (½)
• Repairs and maintenance 8 000 (½)
• Property rates 9 600 (½)
Disposal of Centurion property
Proceeds - market value 4 000 000
Less: Base Cost 2 700 000
Original cost 2 200 000
Plus: Improvements 500 000 (1)
Gain 1 300 000
Period not occupied as primary residence (par 47)
(R1 300 000 x 72/192 or 120/192 months)
OR 6/16 years or 10/16 – correctly applied (487 500) 487 500 (1½)
812 500
Part partially used for trade purposes (par 49)
R812 500 x 20% OR x 80% - correctly applied (162 500) 162 500 (1½)
Capital gain attributable to primary residence 650 000
Less: Primary residence exclusion
(R2 000 000) par 45(1)(a), but limited to actual (650 000) (1)
Capital gain Rnil
Capital gain on Centurion house
R487 500 + R162 500 = R650 000 650 000
 54

ACTIVITY 6.10 – SUGGESTED SOLUTION (continued)

Capital Taxable Marks

Calculations Gains Income
R R R
Sale of shares held speculatively - gross income
(purchased 01/02/2021) - FIFO 1 000 x 16 16 000 (1)
1 000 Shares purchased in 2016 held for >3 years,
therefore s 9C applies - seen as capital in nature –
LU 9.
Recoupment:
Section 9C(5) application @ cost 1 000 x 8.20 8 200 (1)

Opening stock @ cost 46 600 (46 600)

Purchased 01/12/2021 [3 000 x R12.80] 38 400 (1)
Purchased 01/12/2016 [1 000 x R8.20] 8 200 (1)

Closing stock @ cost (4 000 - 2 000) 2 000 x R12.80 25 600 (1)

Add: Capital gain

Proceeds (R16 X 1 000) 16 000 (1)
Less: Base Cost (R8.2 x 1 000) (8 200) (1)
Capital Gain 7 800 7 800

Platinum coins
Proceeds 65 000
Less: Base cost 35 000
Capital Gain 30 000 30 000 (1)
Watch – personal-use asset in terms of par 53 - (1)
Aggregated capital gains 687 800 (1)
Less: Annual exclusion (40 000) (1)
Net capital gain/(loss) 647 800
Inclusion rate at 40% 259 120 (1)
Taxable income for 2024 year of assessment 841 180
Total marks 21
Limited to 14
 55

ACTIVITY 6.10 – SUGGESTED SOLUTION (continued)

PART B
Marks
The sale of the property situated in Centurion by Eddie will be a disposal of an asset in terms
of the Eighth Schedule paragraph (2)(1)(b)(i) (or a disposal for CGT). (1)

Section 35A applies, as the purchase price of R4 000 000 exceeds the threshold of (1)
R2 000 000 stipulated in section 35A(14)(a).

In terms of section 35A, the South African purchaser is obliged to withhold 7.5%, as the (1)
seller (Eddie) is a natural person), from the purchase price (R4 000 000 x 7.5% = R300 000)
as a withholding tax on the sale of the property. (1)

The R300 000 withheld by the South African purchaser must be paid within 14 days of the (1)
date on which the amount was withheld (in terms of section 35A(4)(a)) to the Commissioner
(SARS) (or 15 July 2023).

The R300 000 withholding tax is not a final tax but rather an advanced tax payment and (1)
can be deducted from Eddie’s final tax liability for the 2024 year of assessment. Any excess
will be refunded, provided Eddie submits his tax return for the 2024 year of assessment within
12 months after year-end (by 28 February 2025).
Available 6
Limited to 5
Communication mark 1
Total for part (b) 6
 56

ACTIVITY 6.11 (20 marks / 54 minutes)

Naledi Monareng (‘Naledi’), aged 34 years and a South African resident, is a successful radio talk show
host. Naledi holds a master’s degree in broadcasting from the prestigious University of South Africa. Naledi
has been employed by Radio 705, a South African resident broadcaster since 1 March 2017. Naledi
earned a gross monthly salary of R42 000 for the period 1 March 2023 to 30 May 2023.

In a quest to be globally competitive, Radio 705 seconded Naledi to Dallas, Texas, United States of
America (‘Dallas’) where she fulfilled the role of an assistant producer on the breakfast show at KERA 90.1
for six months (June 2023 to 30 November 2023). During this period Naledi entered into an employment
contract with KERA 90.1, in which KERA 90.1 agreed to pay her $4 000 per month (during this period
Naledi did not receive a salary from Radio 705). Since 1 June 2023, Naledi visited South Africa only once
for seven days to celebrate the 95th birthday of her grandfather (which took place on 3 September 2023).
Naledi returned to South Africa on 10 December 2023 (she was out of the Republic for a total of 186 days
from 1 June 2023 to 10 December 2023).

While she was seconded to Dallas her employment with her South African ‘employer’ was temporarily
suspended and re-activated again from 1 December 2023. She continued to work for Radio 705 from
1 December 2023. For the period 1 December to 10 December 2023, Naledi took annual paid leave from
Radio 705 that she used to tour the United States of America.

On arriving in Dallas, she re-united with her high school sweetheart, Kagiso Hlaudi (‘Kagiso’) in June.
Kagiso and Naledi were married out of community of property on 15 November 2023. She formally
immigrated to the United States of America on 1 February 2024 to be with Kagiso, after resigning from
Radio 705 with immediate effect on 31 January 2024. From 1 February 2024, Naledi was resident of the
United States of America only.

Naledi owned the following assets in South Africa on 31 January 2024:

Date of Purchase Market value on

purchase price 31 January 2024
R R
Mercedes Benz A class 20 April 2021 555 000 504 000
Townhouse in Rosslyn (Pretoria North) (Note 1) 1 June 2019 980 000 1 250 000

Note 1: Naledi sold the townhouse on 15 February 2024 for R1 250 000 to Mr Smith (not a connected
person), a South African resident. Prior to her emigration, Naledi used the townhouse as her
primary residence from the date of purchase until the end of May 2023 and again for the period
from her return to South Africa on 10 December 2023 until 31 January 2024.
From 1 June to 30 November 2023, Naledi let the house to her colleague for a market-related
rental of R15 000 per month.

Assume the average rate of exchange for the 2023 year of assessment was R17,00 per US dollar.
 57

ACTIVITY 6.11 (continued)

REQUIRED Marks
Sub- Total
total

(a) Critically evaluate, supported by calculations, the normal tax implications of the
salary received by Naledi Monareng from both her South African employer
(Radio 705) and her American employer (KERA 90.1) for the 2024 year of
assessment. Provide references to relevant legislation. 7

Communication skills - logical argument 1 8

(b) Briefly reflect on the income tax implications arising from Naledi Monareng’s
immigration to the United States of America on 1 February 2024. Provide
references to relevant legislation. 4

(c) Discuss, with reference to relevant legislation, whether or not Naledi will qualify
for the full primary residence exclusion on the sale of the townhouse. No 7
calculations are required.

Communication skills - logical argument 1 8

Total 20
Extract 2020 Test 1 (adapted)
 58

ACTIVITY 6.11 – SUGGESTED SOLUTION

Part (a)
1 March 2023 to 31 January 2024
Naledi is a South African resident during this period and her salary will be taxed as she is taxed
on her worldwide income (gross income definition par (i) in section 1). (1)
The gross salary of R210 000 (R42 000 x 5 months (Mar-May, Dec & Jan) earned by Naledi (1)
from her South African employer (Radio 705) will be included in gross income. (½)
The gross monthly salary of R408 000 ($4 000 x 6 months x R17,00) from her American (1)
employer (KERA 90.1) will also be included in gross income as she is still a resident in that (½)
period.
The requirements of section 10(1)(o)(ii) must be investigated to determine whether Naledi (1)
qualifies for the section 10(1)(o)(ii) exemption.
Naledi received a salary in respect of services rendered outside the Republic, during her period
of absence, from an employer who is not a resident.
Naledi was outside the Republic for a period of 186 days (given [193 – 7]), which is more than (1)
183 days during the 12-month period.
Naledi was also outside the Republic for a continuous period exceeding 60 full days (1 June (1)
2023 to 1 September 2023 > 60 days), Naledi only returned to South Africa for a period of 7
days in, September 2023, during the six months period 1 June 2023 to 10 December 2023.
In addition, her remuneration is less than R1.25 million for the 2024 year of assessment (1)
Therefore, the salary from KERA 90.1 of R408 000 will be exempt in terms of (1)
section 10(1)(o)(ii).
Available 9
Limited to 7
Communication skills - logical argument 1
Total 8

(b)
When a person ceases to be a resident the person is deemed, in terms of section 9H(2)(a)(i)
and (ii), to have disposed of all their assets and reacquired them at market value. The timing of (1)
the deemed disposal is on the day immediately before the day that the person ceases to be a
resident, i.e., on 31 January 2024. (1)
Section 9H(4) will not apply in respect of immovable property and any assets of a permanent
establishment in the Republic. (1)
The town house in Rosslyn will thus not be deemed to be disposed of, as it is immovable (1)
property in the Republic (section 9H(4)(a)).
Mercedes Benz A class - a deemed disposal in terms of section 9H but because it is a personal-
use asset it is excluded from capital gains tax in terms of par 53 of the 8th Schedule. (1)
Available 5
Limited to 4
 59

ACTIVITY 6.11 – SUGGESTED SOLUTION (continued)

(c)
The letting of Naledi’s property for the period 1 June to 30 November 2023 constitutes
temporary letting of the town house.
Paragraph 49 of the 8th Schedule, apportionment for non-residential use of primary residence, (1)
read together with Paragraph 50 of the 8th Schedule, periods of non-residential use deemed to
be residential use, must be considered. (1)
Note: Even though the proceeds of the townhouse is < R2million (par 45(1)(b)), par 45 (4)(b)
stipulates that par 45(1)(b) does not apply if a portion of the townhouse was used for business
purposes.
Naledi did not have any other primary residence during the period of the temporary letting (1)
(ar 50(b) of the 8th schedule).
Naledi was temporarily outside the Republic (in Dallas) during the period of the letting (1)
(par 50(c)(i) of the 8th schedule.)
Naledi resided in the townhouse as a primary residence for a continuous period of four years (1)
prior to the temporary letting and for a continuous period of one month after the temporary (1)
letting (compared to a period of 1 year (prior to and after letting) as required by par 50(a) of the (1)
8th schedule).
The primary residence exclusion must therefore be apportioned for non-residential use because (1)
the requirements of par 50(a) of the 8th schedule are not met in full.
Available 8
Limited to 7
Communication skills - logical argument 1
Total 8
 60

ACTIVITY 6.12 (20 marks / 66 minutes)

James Scott (38 years old and unmarried) is a home staging consultant who is ordinarily resident in the
United Kingdom (UK). His TV show ‘Property Staging’ has received popularity across the world and he
often gets requests for property staging in other countries. James decided to embark on virtual (online)
home staging. Clients across the world take snapshots (photographs) of their homes and email these to
James, together with the floor plans of their homes. James then creates an interior design layout, using
graphic editor software, while in the UK.

For the past seven years, including the current year, James has visited South Africa twice a year, for the
months of March and September, to accommodate the clients who prefer in person home staging.

For the period 1 March 2023 to 29 February 2024, he received the following income from South Africa:

Income description Note Amount

R

Rental income 1 125 000

Virtual home staging service fees 355 000
In person home staging fees 280 000
Interest received 2 72 000
Gross dividends from South African resident companies listed on the JSE 3 12 000

Notes:

1. James purchased a one-bedroom flat in Melrose Arch, Johannesburg in 2019. He leases the flat to
tenants during the periods that he is not in South Africa.

2. The lucrative South African interest rates and weak Rand to Pound exchange rate led James to
decide to rather invest the rental income earned in South Africa at B Bank (a South African financial
services provider). He received interest of R47 000 from B Bank.

The remainder of the interest received of R25 000 was received from Humbelani (Pty) Ltd after he
lent the company the money to buy construction equipment. The loan agreement stipulates that
should Humbelani (Pty) Ltd fail to pay interest for two consecutive years, the debt will be converted
into equity shares. Humbelani (Pty) Ltd is a South African resident company.

3. During the 2024 year of assessment, James sold shares that he held for investment purposes for
R82 000 (market value). The cost of these shares determined, using the FIFO method, amounted to
R71 900. All these shares were held for longer than three years.
 61

ACTIVITY 6.12 (continued)

ANNEXURE A
EXTRACT FROM THE CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBLIC OF
SOUTH AFRICA AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND
NORTHERN IRELAND
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.
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.
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:
(a) shall be exempt from tax in the Contracting State of which the company paying the dividends is a
resident if the beneficial owner of the dividends is a company which is a resident of the other
Contracting State and controls, directly or indirectly, at least 10 per cent of the voting power in the
company paying the dividends;
(b) except as provided in sub-paragraph (a) of this paragraph, 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 15 per cent of the gross amount of the dividends.
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.
 62

ACTIVITY 6.12 (continued)

Article 13
Capital Gains
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.
 63

ACTIVITY 6.12 (continued)

REQUIRED Marks
(i) Critically evaluate the income tax implications of the rental income received as
well as the sale of the shares that were held for investment purposes, for
James Scott’s 2024 year of assessment. Support your discussion with reasons
and or reference to legislation or relevant case law principles. 7
The Double Taxation Agreement (DTA) between South Africa and the UK
applies (Refer to Annexure A above).
Communication – Clarity of expression 1 8
(ii) Calculate the taxable income of James Scott for the 2024 year of assessment.
Address each type of income received and provide a reason or reference to
relevant legislation for each type of income. 8
Ignore the DTA between South Africa and the UK.

(iii) Discuss, supported by references to relevant legislation, the withholding tax

implications of the interest received by James Scott for his 2024 year of 4
assessment. Ignore the DTA between South Africa and the UK.

Total 20
Extract 2021 Test 1 (adapted)
 64

ACTIVITY 6.12 – SUGGESTED SOLUTION

(i)
James Scott is a non-resident and the source of the income must be determined to evaluate
whether it is from a South African source. Amounts from a South African source must be included (1)
in James’ gross income.
Note that the physical presence test will not apply as James has not been in South Africa for
more than 91 days in any given year in the past 7 years.
Rental income
There is no statutory source rule relating to rental income in section 9 of the Income Tax Act and
therefore common law principles as established in case law need to be applied.
To establish the source of income, the originating cause must be determined.
(Lever Brothers and Unilever Ltd case)
The originating cause of rental income earned from the letting of immovable property is where
the property is used, which in this case is Melrose Arch, Johannesburg, South Africa. (1½)

The rental income of R125 000 is thus derived from a South African source and constitutes gross
income as defined in section 1 (par (ii) of the definition). (1)

As the income is subject to tax in South Africa, regard must be had to the DTA between South
Africa and the UK, because the DTA has the effect of law (overrides the common law or statutory
rules) (section 108(2) of the Income Tax Act). (1)

In terms of paragraph 1 read with paragraph 3 of Article 6 of the DTA, Income derived by a
resident of a Contracting State (i.e. James Scott is a resident of the UK) from immovable property
(including income from agriculture or forestry) situated in the other Contracting State (i.e. South
Africa) may be taxed in that other State (i.e. South Africa).
The house (immovable property) is situated in South Africa and therefore, James Scott will be (1)
taxed on the rental income in South Africa.
Disposal of shares
The original intention of James Scott was to hold the shares as an investment and there was no
change in intention. The disposal of the shares will not constitute gross income as this amount (1½)
will be of a capital nature (CIR v Stott).
The capital gain realised by the non-resident will not be subject to CGT as the shares are not
immovable property in the Republic, nor connected with a permanent establishment as defined (1)
in paragraphs 2(1)(b) (and par 2(2)) of the Eighth Schedule.
It is not necessary to refer to the DTA between South Africa and the UK at this stage, because
if a specific tax does not exist in South Africa, then a DTA cannot create it (s 108(1)). (1)
Available 9
Limited to 7
Communication – Clarity of expression 1
Total 8
 65

ACTIVITY 6.12 – SUGGESTED SOLUTION (continued)

(ii)
R R
Rental income 125 000 (1½)
Source: Immovable property situated in South Africa, South
African source –common law principle.
Virtual Home staging service fee - (½)
Source: Services rendered while in the UK, source will be UK.
In person home staging fee 280 000 (1½)
Source: Services rendered while in South Africa, source will be
South Africa – common law principle.
Interest received from B Bank 47 000 (1½)
Interest received from Humbelani (Pty) Ltd 25 000

Source: South African source, debtors are South African

residents OR (s 9(2)(b) – interest ito s 24J).
James Scott was not in South Africa for a period of more than (72 000) - (2)
183 days (in South Africa for 61 (31 + 30) days) during the
twelve-month period preceding the date on which the interest is
received - S 10(1)(h) may apply.
Sale of shares (½)
Capital nature, not subject to CGT, not included in terms of -
paragraphs 2(1)(b) and 2(2) of the Eighth Schedule.
Gross dividends 12 000 (1½)
Source: South African source, the residence of the distributing
company (s 9(2)(a)).
Local dividends exempt (s10(1)(k)) (12 000) - (1½)
Taxable income 405 000
Available 10½
Limited to 8

(iii)
James 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. (1)
The interest from B Bank of R47 000 will qualify for the section 50D(1) exemption because the
interest is paid by a bank (listed financial institution). (1)
Humbelani (Pty) Ltd is not a banking institution or a listed financial institution, and withholding
tax will apply. Withholding tax at 15% (15% x R25 000 = R3 750) must be withheld by Humbelani (2)
(Pty) Ltd and paid over to SARS.
Total 4
 66

ACTIVITY 6.13 (40 marks / 102 minutes)

You are a tax lecturer at Unisa and received the following e-mail queries from students who are registered
for the TAX4862 module. Please ignore any applicable double tax agreements and accept that all persons
are ordinarily residents in South Africa, unless otherwise stated.

Query 1 from student 1 11 marks

While preparing for test 1 I tried to answer the following question that I received from my friend who is
studying CTA at a residential university:

The Malony Trust (fully discretionary) owns an apartment that was sold to the trust by Jacob Malony
(married out of community of property) for R1.8 million on 1 April 2023 when the apartment had a market
value of R2 million. The selling price was financed by an interest-free loan account from Jacob to the trust.
The apartment is located in Morzine, France and was inherited by Jacob Malony from his late father. His
father was a resident of France until he died of a heart attack on 20 December 2021. Jacob’s father bought
the apartment in 2013 for R890 000 and the market value of the apartment on date of his father’s death
was R1 500 000. Up to date the Malony Trust has made no repayment on the loan-account. The only
beneficiaries of the trust are Jacob’s two major sons. For the past 10 years Jacob made an annual donation
of R2 500 in September to a local approved public benefit organisation (PBO) for which he received the
necessary section 18A receipt and made no other donations during the year of assessment.

The apartment in Morzine, France was used by the Malony family when they went to visit their father and
other relatives until the date of sale to the Malony Trust. All foreign amounts were correctly translated to
Rands. Assume an annual market-related interest rate of 10% for the twelve months ended on
28 February 2023 and 29 February 2024. Assume the official interest rate for the same period to be 8.75%.

Query 2 from student 2 15 marks

Good morning. I studied LU1 to LU6 and as a result, I need assistance with the following two transactions
in the case study please:

Transaction 1 - Sale of furniture to a Botswana company

Exquisite Furniture (Pty) Ltd (“Furniture”) is a category C-registered value-added-tax (VAT) vendor, with a
March year of assessment. Furniture manufactures furniture to specification and this process is
acknowledged as a process of manufacturing by SARS.

Furniture received an order to manufacture four (4) office desks from Gaborone Furniture (Pty) Ltd
(“Gaborone Furniture”), a non-resident company from Botswana, on 1 January 2024. On 25 March 2024
the four (4) office desks were completed and delivered directly to Gaborone Furniture on the same date,
together with the invoice for the four (4) office desks for R25 000 each (excluding VAT). Although the office
desks were delivered, it still reflected in the closing stock value of Furniture. The sale agreement with
Gaborone Furniture provided for normal credit repayment terms, that is, 30 days for payment. The sale
agreement however contained the following clause:

This agreement is subject to, and conditional upon, the purchaser having the right to return the office
furniture if not satisfied, within ten (10) days of receiving the delivery note. No payment of the applicable
piece of furniture will then be due.
 67

ACTIVITY 6.13 (continued)

Gaborone Furniture inspected the four office desks and found that one of the desks was damaged during
the transport process. They returned the office desk on 4 April 2024 and paid for the other three desks on
the same date.

Transaction 2 - Order received from a client in Johannesburg

On 1 April 2024 Furniture received an order from Beautiful Interior (Pty) Ltd (“Beautiful”) for a very special
set of furniture for which Furniture gave them a quote of R250 000 (including VAT). Beautiful immediately
paid Furniture an amount of R50 000 to get the project going. It was determined that Beautiful would pay
Furniture another R50 000 when the furniture was 50% complete and R50 000 when the furniture was
75% complete and the last R100 000 on delivery of the furniture and receipt of the invoice. The furniture
and its invoice were delivered to Beautiful on 1 July 2024. On inspection of the furniture, Beautiful realised
that the furniture delivered differed from the original design it ordered and as a result refused to make any
further payment. Furniture and Beautiful reached an agreement on 1 July 2024 that Beautiful would accept
the furniture without making any further payment.

Query 3 from student 3 14 marks

Dear tax lecturers, I am working through my study material and attempted an additional question on the
myUnisa platform. I have discussed it in the discussion forum but am getting confused now with all the
different replies. Please help!

Nugella Ntuli (42 years old and unmarried) is a well-known freelancer who specialises as a food critic and
column writer for the local newspaper. As she does not work for any company, she worked from her own
home in Bedfordview, Johannesburg, when she is not travelling. On 1 November 2023, Nugella met with
the producers of MRK Australia, and they made her an offer to present a TV-show for the next two years
in Australia, starting immediately. Nugella is by nature very indecisive and could not decide if she should
immigrate to Australia, or work overseas for two years (without giving up her residency status). At the
same time she wants the best possible South African tax outcome for herself.
Nugella has earned a net taxable income amount of R670 000 from 1 March 2023 until 31 October 2023
from work done in South Africa. Nugella would earn R150 000 per episode (24 episodes will be produced
from 1 December 2023 until 30 November 2025) of which the first two episodes must be completed at the
end of February 2024. Nugella has the following assets/property registered in her name on
1 November 2023:
• Her house in Bedfordview, Johannesburg, Gauteng that she acquired on 1 November 2013 for
R1 600 000 (including Transfer Duty). She used 40% of this property for work purposes since purchase
date and duly claimed allowable tax expenses every year in her Income Tax Return (ITR12). It had a
market value of R3 450 000 on 1 November 2023. She listed this property for sale, fully furnished, and
sold it on 1 February 2024 for only R3 200 000 due to a slow seller’s market.

• Shares in Foodie Plc a listed Australian company where she owns 12% of the equity. She acquired
the shares 10 years ago at a cost of R430 000 and the market value of the shares were R1 185 000
on 1 November 2023. She would like to keep the shares even if she emigrates. She received a net
dividend of R130 500 (after a withholding tax of 10%) on 1 February 2024 into her bank account.
 68

ACTIVITY 6.13 (continued)

REQUIRED Marks
Sub- Total
Total
(a) Query 1
Critically evaluate, supported by calculations, all the donations tax implications
for Jacob Malony for his 2024 year of assessment. Provide short reasons
and/or references to applicable legislation in your answer. 10

Ignore any VAT implications and double tax agreements (DTA’s) that might be
in place.

Communication skills – clarity of expression 1 11

(b) Query 2 (transactions 1)
i) Briefly reflect on whether there are any VAT implications arising from
transaction 1 for Exquisite Furniture (Pty) Ltd during March and April 2024. 3

ii) Summarise the normal tax implications for Exquisite Furniture in respect of
the sale of office furniture to Gaborone Furniture for the 2024 year of
assessment. Refer to applicable case law principles in your answer. 5 8
(c) Query 2 (transaction 2)
Discuss, supported by calculations, the VAT implications for Furniture (Pty) Ltd
that occurs due to transaction 2. You should include the time of supply rules in
your answer. 7
(d) Query 3
Assess whether it would be better for Nugella Ntuli to emigrate on 1 November
2023 or to temporarily work overseas for the two-year time period. Your
evaluation should be in the form of a comparative table and should show the
calculation of the effect on taxable income for the 2024 year of assessment if 13
Nugella:

- did not emigrate, or

- decided to emigrate.

If an asset, or income item has no (a nil) effect on the taxable income of Nugella,
you need to provide a reason or applicable reference to relevant legislation.
Ignore any VAT implications and double tax agreements (DTA’s) that might be
in place.

Communication skills – layout and structure 1 14

Total marks 40
 69

ACTIVITY 6.13 – SUGGESTED SOLUTION

Query 1
Sale of apartment in France for less than market value:
The difference between the market value of the apartment on the date of the disposal
(R2 000 000) and the selling price (R1 800 000) therefore R200 000 is deemed to be a
donation (1) (section 58(1)(a)) (1)

However, Jacob is a resident who inherited an apartment in a foreign country (France)

from his father who was not a resident of the Republic (he was a resident of France). (1)
Therefore the deemed donation is specifically exempt from donations tax as it was an (1)
inheritance from his father who was on date of his death not an ordinarily resident in South
Africa (section 56(1)(g)(ii))

The R2 500 annual donation made to a PBO is exempt in terms of section 56(1)(h). (1)

Granting an interest-free loan of R1 800 000 to the Malony Trust:

Jacob is a natural person who provided an interest-free loan to a trust of which he is a
connected person. Jacob and the Malony Trust are connected persons as Jacob’s sons
are the only beneficiaries of the trust (par (b) of def of connected person in section 1). (1)
Section 7C is therefore applicable (low interest loan to trust and connected parties) and
a deemed donation needs to be calculated. (1)

The difference between the interest calculated on the loan at the official interest rate
(7.5%) and the actual interest paid at 0% is deemed to be a donation for donations tax (1)
purposes. (Section 7C(3))

The interest needs to be calculated as simple interest calculated daily (Section 7D(b)) (1)

The amount of the deemed donation is: R1 800 000 x (8.75% - 0%) x 335/366 days = (1)
R144 160.

The deemed donation of R144 160 should be reduced with the basic exemption of
R100 000 (Section 56(2)(b)). (½)

R44 160 (R144 160 – R100 000) will be subject to donations tax at 20% as Jacob has only (1)
made donations of less than R30 000 000 (R44 160 x 20% = R8 832).

The donation is deemed to have been made on 29 February 2024 (on the last day of the
year of assessment of the trust) and the donations tax should be paid to SARS on or (1)
before 31 March 2024 (Section 7C(3) & section 60(1))
11½
Limited to 10
Communication skills 1
Total 11
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ACTIVITY 6.13 – SUGGESTED SOLUTION (continued)

i) VAT implication
Direct export of furniture (Order from Botswana)
The furniture is the export of goods that is directly delivered by the vendor to a recipient in (1)
an export country (par (a) of definition of exported).
It is a zero-rated supply and output tax will be levied at 0% (s 11(1)(a)(i)). (1)
When one of the desks are returned there is no reciprocal input tax on the credit note as (1)
the output tax was zero-rated.
Available part i) 3
ii) Normal tax implications
Issue
Exquisite furniture sold the furniture (trading stock) on credit, subject to a condition being met.
In terms of the gross income definition in section 1 an amount will be included in gross
income at the earlier of receipt or accrual. The crux of the matter is thus if an amount of
R100 000 (4 X R25 000) accrues to Exquisite furniture. (1)
Case law principles
Accrued means not only entitled to and not only when the amount is received (People's (1)
Stores) but also needs to be unconditional (Mooi).
The onus of proof is on the taxpayer in terms of section 102 of the Tax Administration Act
(1)
(TAA)
Application to issue
The sale agreement came into effect on 25 March 2024, (also the date of delivery of the trading
stock) but subject to a condition as Gaborone Furniture had 10 days to accept the (1)
consignment.
The sale condition was only met on 4 April 2024 (2025 year of assessment) and this is the
(1)
date on which Exquisite Furniture is unconditionally entitled to the R75 000.
Conclusion
No accrual takes place in the 2024 year of assessment, as the amount accrues in 2025.
Therefore, there is no inclusion in gross income in 2024 i.r.o. the sale of trading stock to (1)
Gaborone Furniture.
Available part ii) 6
Max for part ii) 5
Total Query 2 (transaction 1) 8
 71

ACTIVITY 6.13 – SUGGESTED SOLUTION (continued)

Query 2 (transaction 2)

Where the consideration for a supply is payable based on the progress made, in other
words it is paid in instalments or periodically and in relation to the progressive or periodic
supply (1), the time of supply will be the earliest of the date when payment is due or (2)
received, or when the invoice for the payment is issued. (1)
The time of supply for the first R50 000 received would have been when the R50 000
was paid (1 April 2024) and (1)
output tax of R50 000 x 15/115 = R6 522 had to be accounted for on this date. (1)
The time of supply for the second and third R50 000 would also be on the date of the (1)P
payment of these amounts. Output tax of R6 522 (i.e. R50 000 x 15/115) had to be
accounted for on each payment date.

On 1 July 2024 when the furniture was completed and an invoice of R250 000 was issued
(1) and delivered together with the furniture, Furniture had to account for a further output (1)
tax of R13 043 (R100 000 x 15/115) (1). (1)

As Furniture agreed with Beautiful that Beautiful did not need to pay the additional
R100 000, Furniture had to issue a credit note for R100 000 in terms of section 21(1). (1)

After issuing the credit note Furniture could claim input tax of R100 000 x 15/115 = (1)
R13 043.
Total 9
Limited to 7
 72

ACTIVITY 6.13 – SUGGESTED SOLUTION (continued)

Query 3
Calculation Not Emigrated –
emigrated – Non-resident
resident
R R R
Net income before 1/11/2023 670 000 670 000 (1)
TV –shows: 150 000 x 2 300 000 (1)
Not from a South African nil (1)
source ito s 9 or common law
Foreign dividend: 130 500 x 100/90 145 000 (1)
Not from a South African - (1)
source ito s 9 or common law
Foreign dividend exemption (145 000) _ (1P)
S 10B(2)(a): > 10% and listed
CGT:
Residence: Proceeds 3 200 000 3 450 000 (2)
Less: Base cost (1 600 000) (1 600 000) (1)
Capital gain 1 600 000 1 850 000
Less: 40% business
use 640 000 (740 000) (1)
Net capital gain 960 000 1 110 000
Less : R2 m exclusion
(par 45(1) of the
Eighth Schedule)
limited to (960 000) (1 110 000) (1)
Foreign shares: (s 9HA)
Proceeds 1 185 000
Less: base cost: (430 000)
755 000 (1)
Aggregate gain (add business 640 000 1 495 000
use portion of residence)
Less: annual exclusion (40 000) (40 000) (½)
600 000 1 455 000
Inclusion rate 40% 240 000 582 000 (½)
Taxable income: 1 210 000 1 252 000

Conclusion: It seems as if there is no conclusive difference (R42 000) between her staying
to be a resident or non-resident. What Nugella needs to remember is that Australia may
have different taxing rights (not provided in Question) which may affect her decision. (1)
Available 14
Limited to 13
Communication skills – layout and structure 1
Total for part (e) 14
 73

The table below shows the link between the integrated activities you attempted (Activities 6.7 to 6.13) and
the specific outcomes and assessment criteria:

Learning outcome(s) Assessment criteria

Activity 6.7

Activity 6.8

Activity 6.9

Activity 6.10

Activity 6.11

Activity 6.12

Activity 6.13
1. Assess the tax • Conclude on the legal form, √ √
profile of a business structure and
taxpayer to residence status of a
determine the taxpayer to determine the
various taxes types of taxes payable (e.g.
payable by a value-added tax, donations
taxpayer. tax, estate duty, normal tax
(including capital gains tax),
prepaid taxes, dividends tax,
withholding tax).
• Assess information needed √ √ √ √ √ √ √
to determine the various tax
liabilities, including
• the role-players in the
tax landscape,
• the types of taxes and
their interaction and
• the underlying principles
of a tax system.
• Determine the various tax √ √ √ √ √ √ √
liabilities and to provide
reasons for the inclusion or
exclusion of amounts.
• Interpret the tax treatment of √ √ √ √ √ √ √
a transaction with reference
to legislation, double tax
agreements and case law.
• Determine the taxation √ √ √ √ √ √
payable/ refundable on
income in the Republic by
non-residents.
2. Advise • Evaluate transactions to √ √ √ √ √ √ √
taxpayers on the determine the effect on an
tax effect of individual or corporate
transactions,
taxpayer’s tax liability.
operations,
schemes,
agreements or
events and • Determine the tax √ √ √
calculate the tax consequences of emigrating
consequences from the Republic (e.g.
thereof, taking deemed disposals) or
into account the immigrating to the Republic
various taxes
payable. of South Africa.
 74

Learning outcome(s) Assessment criteria

Activity 6.7

Activity 6.8

Activity 6.9

Activity 6.10

Activity 6.11

Activity 6.12

Activity 6.13
3. Advise on • Assess the normal tax and √
specific tax and VAT consequences for the
financial business and the investor of
planning
the investment and financial
opportunities for
individuals as planning tactics being
well as for considered and advise the
business taxpayer on possible
entities. alternatives.
• Reflect on the tax √
consequences of shifting
income between connected
persons by making use of
donations, interest free loans
and trusts (e.g. section 7 and
the attribution rules) or
entities (e.g. tax avoidance
rules).
• Critique the available options √
for a specific decision-
making situation to establish
the most suitable option and
compose a suitable
response of the information
to the taxpayer if within the
field of speciality or refer to
an appropriate expert if
necessary.
 75

6.9 LIST OF REFERENCES OF LEARNING UNIT 6

• SAICA. 2024. SAICA Student Handbook 2023/2024 Volume 3. Durban, LexisNexis.

• SARS. 2020. SARS Comprehensive CGT guide, Available at: https://www.sars.gov.za/lapd-
cgt-g01-comprehensive-guide-to-capital-gains-tax/
• South Africa. 2023. Taxation Laws Amendment Act (Act No. 20 of 2022). Cape Town:
Government Printer
• South Africa. 2023. Taxation Laws Amendment Act (Act No. 17 of 2023). Cape Town:
Government Printer
• Stiglingh, et al. 2024. ‘Chapter 17: Capital Gains Tax (CGT)’, Silke: South African Income Tax
2024. Durban, LexisNexis.

______
END OF LEARNING UNIT 6
©
UNISA
2024