2.3 Gross Income – Special Inclusions (41)

Question 1

Certain amounts will be included in gross income despite the fact

Answer 1

That these amounts are of a capital nature or from a non-SA source.
They include all payments made by an employer to an employee

Question 2

These special inclusions are as a result of the following words at the end of the gross income definition.

Answer 2

But including, without in any way limiting the scope of this definition, such amounts (whether of a capital nature or not) so received or accrued or as described (paragraphs (a) to (n))

Question 3

The special inclusions described are:

Answer 3

• Annuities - (a)
• Alimony - (b)
• Services rendered - (c)
• Restraint of trade - (cA)
• Restraint of trade (natural persons) – (cB)
• Lump sum benefits (d)
• Lump sum from pension, provident and retirement annuity funds – (e)
• Lease premiums - (g)
• Know-how payments – (gA)
• Leasehold improvements - (h)
• Fringe benefits – (i)
• Sale of assets similar to trading stock – (jA)
• Dividends - (k)
• Key-man insurance policies - (m)
• Recoupment and other inclusions – (n)

Question 4

Annuities (a) have the following characteristics:

Answer 4

• It provides a fixed annual payment (even if divided into instalments). Does not mean amount won’t change.
• The payment is repetitive
• It is chargeable against some person, which implies that there is an obligation to pay. This means that voluntary payments, even if they are repetitive, are not annuities.

Note that where a debt is payable in instalments will not qualify as annuity.

Question 5

Alimony (b) is defined as follows

Answer 5

Any amount payable to taxpayer by spouse or former spouse, under any judicial order of written agreement of separation or under any order of divorce, by way of alimony or allowance or maintenance of the taxpayer or any children.

Question 6

S 10(1)(u) provides an exemption for alimony

Answer 6

Received in terms of a post 21 March 1962 divorce settlement. This arose as the paying spouse in a post 1962 divorce is not allowed to deduct alimony payments in terms of s 21. Therefore alimony must not be included in gross income of recipient in terms of post 1962 divorces.

Question 7

Services rendered (c) includes any amounts

Answer 7

Received or accrued in respect of services rendered or from employment, whether such amounts are capital or revenue in nature.
This includes any amount (including a voluntary award which could be argued is a capital receipt) which was received or accrued for services rendered.
If an amount which should have been received by a person who rendered services is paid to another person, the person who rendered the service will deemed to be the recipient and added to their income.

Question 8

Services rendered (c) excludes amounts

Answer 8

That are included in gross income due to the provisions of par (i) fringe benefits to ensure that amounts are not double counted in gross income.

Question 9

Services rendered (c) will apply where there is a

Answer 9

Casual relationship, ie. A direct link, between the services rendered and the amount paid. The amount received must also have an ascertainable monetary value.
Examples: Annual bonuses, performance bonuses, tips, etc

Question 10

Restraint of trade (cA)

Answer 10

Includes restraint of trade payments despite the fact that these receipts are generally of a capital nature (as it is a payment in exchange for the right to work freely), provided that the amount was received / accrued to a person who:
* Is or was a labour broker
* Is or was a personal service provider

Question 11

A restraint of trade receipt (cA) will also be included if

Answer 11

Received by a natural person in respect of any current, past or future employment or the holding of an office.

Question 12

Restraint of trade (natural persons) – (cB) includes

Answer 12

Any amount received by or accrued to any natural person as consideration for any restraint of trade imposed on that person in respect or by virtue of:
* Employment or the holding of any office
* Any past or future employment or the holding of an office

Question 13

Lump sum benefits (d) are

Answer 13

Any lump sum benefit which is paid by an employer to an employee will be included in gross income of recipient, despite the fact that these receipts are generally capital in nature.

Question 14

Lump sum benefits (d) include amounts

Answer 14

Paid out as a result of a termination, loss, cancellation or any variation of employment but excludes amounts paid from any pension, provident or retirement annuity fund (e).
In addition, an amount payable as the result of a death of a person is deemed to accrue to that person immediately prior to death.

Question 15

Lump sum benefit (d) examples

Answer 15

• Compensation paid to director who loses directorship
• A lump-sum paid on resignation, eg bonus or accumulated leave pay
• Compensation paid to employees for a decrease in annual leave entitlement in terms of a service contract

Question 16

Where the lump sum benefit (d) relates to a

Answer 16

Retrenchment benefit or the employee is 55 years or older or is unable to continue with employment as a result of illness or injury, it will be treated as a severance benefit and subject to tax in terms of its own table.

Question 17

Effective from 1 March 2012 the following also fall within Lump sum benefits (d)

Answer 17

• Amounts received by or accruing to a person, or dependent or nominee of the person, in respect of proceeds from a policy of insurance held by the employer or company of which the person is or was an employee or director.
• Amounts received by or accruing to a person, or dependent or nominee of the person, in respect of an insurance policy which was ceded to that person, or dependent or nominee of the person by their employer or a company of which they were a director

Some exemptions may apply in terms of s 10(1)(gG).
From this date, employee lump sum benefits (severance benefits) are taxed in same way as lump sums from retirement funds.

Question 18

Lump sums from pension, provident and retirement annuity funds – (e)

Answer 18

Individuals may invest funds in retirement funds with a view to creating an income after retirement. A lump sum from such funds is generally income in nature, however, it can be argued that a portion is a return on own funds and is therefore capital in nature.
Par (e) includes a portion of lump sum benefits received from funds in gross income.

Question 19

The taxable portion of lump sum (e) on retirement or death is

Answer 19

The lump sum less any contributions that have not been allowed as a tax deduction plus the taxable portion of all lump sums previously received.
Amended from 1 October 2007, the first R500 000 (less the amount granted as tax free in respect of previous lump sums paid) of the lump sum is tax free and the balance is taxed at rates provided.
The taxable lump sum cannot be set off against an assessed loss.

Question 20

The taxable portion of (e) of any pre-retirement lump sum is

Answer 20

The amount withdrawn less the amount transferred to a new fund less R 25 000.
The balance is subject to tax as per table accruing from 1 March 2014.

Question 21

Lease premiums (g)

Answer 21

Is the payment for the right to use an asset (differs from rental which is payment for the use of the asset) or a payment instead of or in addition to rental.
Could be argued to be capital in nature therefore specific inclusion.
Payment must be made by the lessee to the lessor.

Question 22

Lease premiums (g) normally take the form of

Answer 22

Lump sum payment at the beginning of the lease, however, no provision is made to spread the premium over the period of the lease and it is taxable in the year that it is received or accrued.
Section 11(h) provides some relief and s 11(f) allows for deduction.

Question 23

Know-how payments (gA)

Answer 23

Any payment received for imparting or the undertaking to impart any scientific, technical, industrial or commercial knowledge or information, or for the rendering of any assistance or service in connection with such knowledge.

Question 24

Know-how payments (gA) include

Answer 24

• Technical advisory fees
• The sale of information
• The receipt of any amount if it carries with it the right on the part of the payer to have information or knowledge given to him
• The sale of operating manuals.

Excludes copyright.

Question 25

Leasehold improvements – (h)

Answer 25

Are improvements which a lessee makes to property that he has leased from a lessor. The lessee may be willing to spend money on improvements as he has use of property, however the lessor will benefit through an increase in value of property without any expense being incurred.
SARS practice to include in the year completed.
Some relief may be given in terms of s 11(h).

Question 26

Leasehold improvements – (h). If a lessee makes these improvements out of his

Answer 26

Own free will, the lessor will not be taxed on these improvements. However, par (h) provides that the value of any improvements must be included in the lessors gross income if the lease stipulates that the lessee must make these improvements.

Question 27

Leasehold improvements – (h). The amount to be included is either

Answer 27

The amount stipulated in the lease, or where no amount is stipulated, the fair and reasonable value of the improvements. Where the lessee voluntarily spends more than the amount stipulated in the lease, the amount included will be limited to the amount per the lease.

Question 28

Leasehold improvements – s 11(g) allows a

Answer 28

Corresponding deduction of lease improvements to lessee spread over the period of the lease or 25 years (whichever shorter)
= Total cost / Period
If renewed SARS may include this renewal period as part of period over which improvements can be claimed.
Deduction allowed to commence in year completed and must be reduced for a partial year.
Full amount deducted if lease is terminated before specified date.

Question 29

Fringe benefits – (i)

Answer 29

Benefits which are provided by an employer to employees or holders of office, eg. Free accommodation, low-interest loans, the use of car etc.

Question 30

Fringe benefits (i) cannot generally

Answer 30

Be turned into money and are frequently in a form which is difficult to value.
For this reason they are included at a value which is determined in terms of the Seventh Schedule to the Income Tax Act.

Question 31

Sale of assets similar to trading stock – (jA)

Answer 31

Any amount received by or accrued to a person from the disposal of any asset manufactured, produced, constructed or assembled by that person for the purposes of manufacture, sale or exchange by that person is included.

Question 32

Dividends (k)

Answer 32

All local and foreign dividend receipts and accruals are included.
Section 10(1)(k) exempts most local dividends.
Effective 1 April 2012 most local dividends are subject to a flat withholding dividend tax rate of 20%
S 10B exempts a portion of foreign dividends.

Question 33

Key-man insurance policies (m)

Answer 33

Is a policy whereby an employer insures the life of an employee, the employer being the beneficiary of the policy.
If the employer has deducted premiums payable on this policy in terms of s 11(w), then the proceeds on this policy when it matures will be included.

Question 34

Recoupments and other inclusions (n)

Answer 34

Any amounts which in terms of any other provisions of the Income Tax Act are required to be included.

Question 35

Recoupments – s8(4)

Answer 35

Amount which are recouped or recovered, ie. Previously been allowed as a deduction but have now been recovered.
Furthermore, any amounts recouped or recovered will be deemed to be from SA source notwithstanding it may have been recouped outside SA.

Question 36

General recoupment provision – s 8(4)(a)

Answer 36

Provides that any amount which has been previously been allowed as a deduction under s 11 to s 20 and which has been recovered or recouped during the year must be included in taxpayers income.

Question 37

Deferment of recoupment – s 8(4)(e)

Answer 37

If an asset is disposed of involuntarily by way of theft or destruction, a taxpayer (who uses the full proceeds to purchase a replacement asset) may elect that the recoupment on the disposal of the original asset is not included in income in the year in which it arises.
In terms of amended s 8(4)(e) in effect from 22 Dec 2003, the recoupment will be spread over a period of years.
The portion to be added to income each year = Tax allowance on replacement asset in current year / Total tax allowance in respect of the replacement asset.
The replacement asset must be purchased and brought into use within a set period of time otherwise the taxpayer will be required to recognise the full recoupment in the year of disposal.

Question 38

Section 19 – Recoupment on the reduction or cancellation of a debt

Answer 38

In effect from 1 Jan 2013, applies to trading stock, tax-deductible expenses and allowance assets.
The reduction amount is the amount by which the debt is reduced less the amount applied by the person as a consideration for the reduction.

Question 39

Section 19 – Trading stock

Answer 39

If a debt was incurred in order to purchase trading stock, the reduction of the debt has the following effect:
* If the stock is still on hand, the cost of the stock must be reduced by the reduction amount
* If the stock is partly sold, the cost of the stock still on hand must be reduced and the balance of the reduction must be treated as income.

Question 40

Section 19 – Tax-deductible expense

Answer 40

If a debt was incurred in order to pay for a tax deductible expense, then the reduction amount is a recoupment of this expense which must be added to gross income.

Question 41

Section 19 – Allowance asset

Answer 41

If a debt was incurred in order to purchase a depreciable asset or an asset on which an allowance may be claimed, the reduction amount first reduces the base cost of the asset and any remaining balance is a recoupment of the capital allowances which must be added to gross income.