3.1 Exempt Income (42)

Question 1

After determining gross income you will have to establish whether

Answer 1

Any of this income is exempt from tax. (reduces tax liability)
Exempt income is covered in s 10 and s 10A of the Income Tax Act.

Question 2

Exemptions fall into two categories:

Answer 2

• Entities which are exempt from tax. These entities can be completely exempt from the payment of any tax on their income (eg: government) or can be partially exempt depending on the types of income they earn.
• Income which is exempt from tax. The income can either be totally exempt (eg: local dividends) or partially exempt (eg: interest earned by natural persons)

Question 3

1) The following are exempt in terms of s 10:

Answer 3

• The receipts and accruals of the Government in the local, provincial or national sphere – s 10(1)(a).
• The receipts and accruals of:
  - The government of any other country
  - Any foreign government agency appointed by that Government to administer its responsibilities and functions in terms of a development assistance agreement.
  - Any multi-national organisation providing donor funding in terms of an official development assistance agreement – s 10(1)(bA).
• The receipts and accruals of the
  - African Development Bank
  - World Bank including the International Bank for Reconstruction and Development and International Development Association
  - International Monetary Fund
  - African Import and Export Bank
  - European Investment Bank
  - New Development Bank – s 10(1)(bB)
• The pensions of
  - Any SA ex-president or ex-vice president or their surviving spouses paid by reason of occupying such post.
• The salary of
  - Foreign diplomats and their foreign domestic or private servants
  - Certain foreign subjects temporarily employed in the Republic – s 10(1)(c)(v)

Question 4

2) The following are also exempt in terms of s 10:

Answer 4

• The receipts and accruals of any institution, board or body approved by SARS with its principal object being to conduct certain activities
• The receipts and accruals of any political party registered under the 1996 Electoral Commission Act – s 10(1)(cE)
• The receipts and accruals of non-residents acting as owners or charterers of ships or aircraft in SA if their home country provides reciprocal relief to SA residents – s 10(1)(cG).
• The receipts and accruals of any public benefit organisation (PBO) approved by the Commissioner in terms of s 30(3) are exempt to certain extent. – s 10(1)(cN) (run mainly on donations and fundraising)
• The receipts and accruals of any recreational clubs (sport / leisure activities) approved by the Commissioner in terms of s30A are exempt if derived in certain forms
• Certain receipts and accruals of a Small Business Funding Entity are exempt from 1 March 2015.

Question 5

The receipts and accruals of any institution, board or body established by or under any law and which as its sole or principal object :

Answer 5

• (aa) conducts scientific, technical or industrial research
• (bb) provides useful or necessary commodities, amenities or services to the State or members of the general public
• (cc) carries on activities including the rendering of financial assistance by way of loans or otherwise designed to promote commerce, industry or agriculture or any branch thereof.

Question 6

The receipts and accruals of any public benefit organisation (PBO) approved by the Commissioner in terms of s 30(3) are exempt to the extent that:

Answer 6

• Receipts are not from business or trading activities.
• Receipts are from certain integral, occasional, or approved business or trading activities and that they do not exceed the greater of 5% of total receipts or R 200 000 pa – s 10(1)(cN).

Question 7

The receipts and accruals of any recreational club approved by the Commissioner in terms of s30A are exempt if derived:

Answer 7

• In the form of membership or subscription fees paid by members
• In the form of payments by members in respect of social or recreational services
• From fund-raising activities which are of an occasional nature and undertaken substantially with assistance on a voluntary basis
• From any other source to the extent that they do not exceed the greater of
• 5% of total membership or subscription fees
• R120 000 – s 10(1)(cO)
• If exceeds taxable portion taxed at 28%

Question 8

The following receipts and accruals of a Small Business Funding Entity are exempt from 1 March 2015:

Answer 8

• Amounts received or accrued otherwise than from any business undertaking or trading activity
• From certain integral activities directly related to the sole/principal object of the entity, which are substantially related to the recovery of cost and do not result in unfair competition against taxable entities.
• Carried out substantially by unpaid volunteers
• From certain activities approved by the Minister of Finance
• From other business undertakings or trading activities that do not exceed the greater of:
• 5% of total receipts and accruals of the entity for that year of assessment
• R 200 000 – s 10(1)(cQ)

Question 9

The receipts and accruals of any of the below which has been approved by the Commissioner subject to certain conditions set out in s 30B of the Act:

Answer 9

• Pension fund, provident fund, retirement annuity fund
• Benefit fund, trade union, chamber of commerce or industries, local publicity association, mutual loan association, fidelity or indemnity fund.
• Any company, society or association of persons established to promote the common interests of persons (who are its members) carrying on a particular kind of business, profession or occupation – s 10(1)(d).

Question 10

Levies – s 10(1)(e)

Answer 10

Exempts levies received by body corporates, share block companies and any other association of persons formed solely for the purpose of managing the collective interest common to all of its members including the collection of levies and the administration of expenditure in respect of the common property.
In addition any other income earned by entities is exempt up to R 50 000

Question 11

Certain pensions and compensation – s 10(1)(g)

Answer 11

The following are exempt from tax:
* Any amount received as a war pension and any benefit under any law relating to the payment of compensation in respect of diseases contracted by persons employed in mining operations – s 10(1)(g)
* Any disability pension – s 10(1)(gA)
* Workmens compensation and death benefits paid by the employer – s 10(1)(gB) (exempt up to R300 000)
* Compensation and aid in terms of the Road Accident Fund – s 10(1)(gB)(iv)
* Any amount received by or accrued to any resident under the social security system on any other country or any pension received from source outside SA – s 10(1)(gC)
* Any amount received by resident from source outside of SA in consideration of past employment outside the country
* Any funeral benefit payable in terms of S6F of the Special Pensions Act , 1996 – s 10(1)(gD)
* Any amount awarded to a person by the minor beneficiary fund – s 10(1)(gE)

Question 12

Insurance benefits accruing to employees – s 10(1)(gG)

Answer 12

Exempts certain proceeds from insurance policies that have been included in a taxpayers gross income in terms of par (d)
If premiums have not been deducted then payouts exempt.
If company paying policy is claiming premiums as a deduction then the company will be taxed on receipt of benefit.

Question 13

In terms of Insurance benefits accruing to employees, the following are exempt:

Answer 13

• Risk policy with no cash or surrender value. Where premiums previously treated as fringe benefit and deducted then exemption not applicable.
• All other policies – where the premiums have been included in the income of the employee as a taxable fringe benefit since the date on which the policy was entered into

With these policies, if at any time the premiums were not included in income the exemption will not apply

Question 14

Insurance proceeds accruing to employers – s 10(1)(gH)

Answer 14

Insurance proceeds received by an employer in respect of a policy of insurance on the life of an employee will be exempt if both of the following apply:
* The policy relates to the death, disablement or severe illness of an employee or director (or former)
* No amount of premiums payable was deducted as an expense

Question 15

Policy payouts – s 10(1)(gI)

Answer 15

Exempt if all of the following apply:
* The policy relates to the death, disablement, illness or unemployment of a person who is an employee of the policyholder
* The benefits are paid as a result of death, disablement, illness or unemployment
* The benefits are not paid by a retirement fund

Question 16

Non-residents interest exemption – s 10(1)(h)

Answer 16

Exempts SA source interest received by person who is not a resident, unless that person:
* Is a natural person who was physically present in SA for a period exceeding 183 days at any time during the 12 month period prior to receipt
* Is a natural or legal person who at any time during the 12 month period preceding carried on business through a permanent establishment in SA
Interest paid to a non-resident from a SA source is subject to a 15% withholding tax subject to a reduction in rate in terms of a double taxation agreement. (Institution withholds the tax and pays over net)

Question 17

Natural persons interest exemption – s 10(1)(i)

Answer 17

Exemption on local interest up to:
* Persons under 65 – R 23 800
* Persons over 65 – R 34 500
Subtracted off as exempt income (limited to amount if less)

Question 18

Tax-free savings account – s 12T

Answer 18

Individuals are allowed to open one or more accounts per year, where they may invest in either interest bearing or equity instruments or both.
However total contributions may not exceed annual limit of R 36 000 or lifetime limit of R 500 000 (40% thereafter)
All gains in form of interest, dividends or capital gains will be tax free.

Question 19

SA dividends – s 10(1)(k)(i)

Answer 19

For individuals dividends paid from SA companies, the company withholds the dividend tax of 20% and pays over net (not taxed in hands of recipient)
For companies that receive dividends from other SA companies the full dividend is exempt (no withholding tax)

Question 20

SA dividends – s 10(1)(k)(i) except the following

Answer 20

The effect of certain of the below exceptions is to tax a company at ordinary rates on the dividends received by or accrued to it on shares that it does not actually own, ie. Where it has no meaningful underlying stake in the company
* Received from a Real Estate Investment Trust or controlled property company
* If it is distributed by any portfolio of any collective investment scheme
* Where dividends form part of any consideration received in respect of the sale of shares to a company in respect of a share buy-back scheme
* Received in respect of a restricted equity instrument
* Received in consequence of a cession
* Received in respect of borrowed shares
* Foreign dividends and dividends paid by a headquarter company
* To a company by the exercise of the discretionary power of a trustee of a trust
* To a company on a share acquired by the company, where that share or equivalent must be returned to the seller

Question 21

Section 8E - Dividends on hybrid equity instruments

Answer 21

A hybrid equity instrument exists where the issuer of the share has an obligation to redeem the shares within 3 years or the holder has the right to have the shares redeemed or acquired within 3 years
Dividends on these shares will not be exempt

Question 22

Section 8EA – Dividends on 3rd party backed shares

Answer 22

Where the holder of the shares has the right to require some person other than the company to buy shares from it then the dividends on these shares will be taxed as income.

Question 23

Exemption of foreign dividends and dividends paid by headquarter companies – s 10B

Answer 23

Intention was to deal with disparity of maximum rates of tax that applied between domestic and foreign dividends.
Local dividends are now subject to a final withholding tax of 20%
Foreign dividends taxed at marginal rate up to 45%
S10B serves to exempt a portion of foreign dividends so that the max rate does not exceed 20%

Question 24

Exemption of foreign dividends and dividends paid by headquarter companies – s 10B, formula =

Answer 24

A = B X C
A = The amount to be exempted
B = The ratio for natural persons - 25/45 (55.55%) or companies – 8/28 (28.57%)
C = The total of foreign dividends received that are not exempt

Question 25

Section 10(2) exempts from normal tax the following foreign dividends:

Answer 25

• If that person holds at least 10% of the total equity shares and voting rights in the foreign company
• If that person is a company and the foreign dividend is paid by another foreign company in same country
• Dividends paid to resident out of profits of a foreign company if these have been included in the SA shareholders income
• The dividend is on a foreign share listed on the SA stock exchange

Question 26

S6quat rebate

Answer 26

If you receive foreign dividends and you were taxed in that country this section gives you some relief
You can offset some of that tax off the amount in SA
S6quat rebate = [Tax payable x (foreign dividend received –exempt portion of R100 000)] / Taxable income
The rebate is limited to the tax amount paid (no credit)

Question 27

Royalties paid to non-residents – s 10(1)(i)

Answer 27

The company paying royalty must withhold and pay to SARS therefore exempt for non-resident
Unless physically present in SA for 183+ days or carried on a business through permanent establishment, in prior 12 month period
Where not exempt it will not be subject to royalty withholding tax of 15% (taxed as part of your income taxable in SA)

Question 28

Amounts paid to non-resident sportspersons and entertainers – s 10(1)(iA)

Answer 28

Exempts these amounts if they have been subject to withholding tax (by company paying these people and paid to SARS)

Question 29

Unemployment benefits – s 10 (1)(mB)

Answer 29

Benefits payable in terms of the Unemployment Insurance Contributions Act is exempt in hands of recipient.

Question 30

Certain fringe benefits – s 10(1)(n)

Answer 30

• Uniform allowance – s 10(1)(nA
• Employee transfer costs – s 10(1)(nB)
• Employee share schemes – s 10(1)(nC, (nD) and (nE)

Question 31

Uniform allowance – s 10(1)(nA), applies where:

Answer 31

• Condition of employment
• Wear a special uniform while on duty
• Clearly distinguishable as a uniform

Question 32

Employee transfer costs – s 10(1)(nB) includes

Answer 32

Any expenses that may arise in consequence of:
* Transfer of employee
* New appointment
* Termination

Question 33

Section 10(1)(nC) – Broad-based Employee Share Plan

Answer 33

The receipt of qualifying equity shares in a broad based employee share plan is exempt but limited to max of R 50 000 over five year period.

Question 34

Section 10(1)(nD) – Employee share schemes

Answer 34

Exempts the receipt which constitutes an equity instrument acquired by that person or consideration for the disposal of an equity instrument which has not vested at the time of acquisition or disposal.

Question 35

Section 10(1)(nE) – Stop loss provision for share incentive schemes

Answer 35

Certain amounts received by employee under a share-incentive plan are exempt, ie. Under the cancellation of a transaction in which the taxpayer bought shares or upon repurchase of shares from the taxpayer.

Question 36

Ship crews and persons employed outside SA – s 10(1)(o)

Answer 36

Exempts any remuneration up to R 1.25 mill if:
* Derived by an person as an officer or crew member of a ship engaged in international transportation of passengers or goods or in the mining for any minerals (outside SA for a total 183+days in YOA)
* Received by person for services rendered outside of SA
* Services must be for or on behalf of employer
* Must be outside SA for 183+ days during YOA
* Must be outside SA for a continuous period exceeding 60 days
* Must render such services during such periods

Question 37

Non-residents in government service – s 10(1)(p)

Answer 37

Exempts amounts received by
* non–resident
* for services rendered outside SA
* for or on behalf of any qualifying employer or provincial sphere of government or municipality in SA

Question 38

Bursaries and scholarships – s 10(1)(q)

Answer 38

Exempts bona fide scholarship or bursary granted to assist any person to study at a recognised educational or research institute.
Provided employee agrees to reimburse employer if they fail to complete their studies.

Question 39

Bursaries and scholarships to persons with a disability – s 10(1)(qA)

Answer 39

Exempts bona fide scholarship or bursary granted to an employee with disability.
Provided employee agrees to reimburse employer if they fail to complete their studies.

Question 40

Government organisations – s 10 (1)(t)

Answer 40

Exempts the receipts of certain quasi-government organisations.

Question 41

Rebates and subsidies – S10(1)(y) to (z)
Government grants and scrapping payments – s 10 (1)(y)

Answer 41

Exempts grants and scrapping payments granted by the State in support of schemes aimed in general at the promotion of SA commerce, agriculture, public health, housing, social and economic development, etc

Question 42

Government grants – s 12P

Answer 42

Exempts government grants if these are listed in the Eleventh Schedule or if these are identified by Minister of Finance in the Government Gazette.
Where grant is for acquisition, creation or improvement of an asset then the cost of the asset must be reduced by amount of grant used for that purpose as follows:
* Trading stock – reduce the s 11(a) deduction
* Allowance asset – reduce the base cost of the asset