1.1 Introduction

The Income Tax Act 58 of 1962 (the Act) provides a fixed framework to be used when calculating taxable income. This framework stays the same for the different types of enterprises. The order of the framework is important as the components build on one another. The basic framework is as follows:

1.2 Gross income

Gross income is the starting point in the calculation of taxable income, and tax payable. Section 1 of the Income Tax Act defines gross income as follows:
• In the case of a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such a resident, during such year or period of assessment excluding receipts and accruals of a capital nature.
• In the case of a non-resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within or deemed to be within the Republic, during such year or period of assessment, excluding receipts or accruals of a capital nature.

Example 1.2.1 Sole proprietorship
The following information is relevant to Gouwa, a South African resident, during the 2025 tax year:
Fees income                                                 924 186
Local dividends                                           210 267
Foreign dividends                                       41 332

Interest income                                            37 181
Required: Calculate the gross income for Gouws for the 2024assessment year.

Suggested solution
Details                                                               Amount
Gross income
Fees income                                                     924 186
Local dividends                                               210 267
Foreign dividends                                          41 332
Interest income                                              37 181
Total gross income                                        1 212 966

1.3 Special inclusions

Special inclusions are included in Gross Income despite the fact that these amounts are of a capital nature.
Certain amounts will be included in a person’s gross income despite the fact that these amounts are of a capital nature or from a non-SA source. The following are examples of special inclusions, and included in gross income:

• Annuities
• Restraint of trade receipts received by a natural person, labour broker or personal provider
• Lump sum benefits received by an employee from an employer
• Lease premiums
• Know-how payments
• Leasehold improvements
• Recoupments
• Key-man insurance policies

1.4 Recoupments

Recoupments are:

• A ‘special inclusion’ in gross income.
• Amounts which have previously been allowed as a deduction but which have now been recovered.
• Deemed to be from a source within the Republic notwithstanding that such amounts may have been recouped or recovered outside the Republic

1.5 Exempt income

After determining gross income, you will need to establish whether any of this income is exempt from tax. The following are examples of exempt income, as addressed in S10 and S10A of the Income Tax Act:

• UIF benefits
• Bursaries and scholarships granted by an employer to an employee
• Uniform allowance where the employee is required to wear a uniform that is distinguishable from their ordinary clothing.
• The capital element of an annuity amount received under an annuity contract

1.6 Income

Income is the difference between gross income and exempt income.

1.7 Allowable deductions

Requirements that must be met in order for an amount to be deductible under the general deduction formula.

• The taxpayer must be carrying on a trade
• The taxpayer must, in carrying on that trade, derive income
• The amount claimed must constitute an expense or a loss
• The expenditure or losses must be actually incurred during the year of assessment
• The expenditure or losses must be incurred in the production of the income
• The expenditure or losses must not be of a capital nature
• The expenditure or losses must to some extent have been paid out or expended for the purposes of trade

1.8 Prohibited deductions

Prohibited deductions in terms of S23 include:

• Private and domestic expenditure
• Losses or expenses recoverable under a contract of insurance, guarantee, security, or indemnity
• Taxes, penalties, and interest
• Expenses to produce exempt income
• Restraint of trade payments
• Expenditure relating to employment
• Fines and unlawful activities
• Expenditure incurred in the production of foreign dividends
• Premiums on life and unemployment policies

1.9 Taxable income

Taxable income is the difference between income and allowable deductions.

1.10 Calculating taxable income

The Act provides the framework that must be followed to calculate taxable income. Taxable income is the amount that is used to calculate the tax payable for the year. The rate of tax used depends on the types of taxpayers: companies and close corporations pay tax at a flat rate of 28% while individuals pay on a progressive scale (Annexure A). The following structure must be used to calculate taxable income:

The basic formula for the calculation of taxable income i.e. Gross Income Less: Exempt Income Equals Income Less: Deductions Add: Taxable portion of capital gain Equals: Taxable income.

2.1 Introduction

In this section we lay out the theory that is relevant to mastering income tax in South Africa. The information has been
condensed for ease of understanding.

2.2 Five different types of taxation

The Income Tax Act contains the provisions for 5 different types of taxation, including:

• Income Tax
• Turnover tax
• Donations tax
• Dividends tax
• Withholding tax

2.3 Fringe benefits

A fringe benefit refers to payments made to employees (including a partner in a partnership) in a form other than cash. A taxable benefit is deemed to have been granted by the employer to the employee if such benefit is granted as a reward for services rendered or to be rendered.

2.3.1 Acquisition of an asset at less than the actual value

A taxable benefit arises where an employee acquires an asset consisting of any goods, commodity, financial instrument, or property of any nature (other than money), either for no consideration or for a consideration that is less than the
market value of the asset. The value to be placed on such asset shall be the market value thereof, at the time the asset is acquired by the employee, less the value of any consideration given by the employee for such asset.

2.3.2 Travel allowance

Employee’s tax is based on 80% of the travel allowance.However, if the employer is satisfied that at least 80% of the use of the motor vehicle will be for business purposes, the employee’s tax may be based on 20% of the travel allowance.

2.4.3 Right of use of a motor vehicle

Determination of the taxable value for all vehicles provided by an employer is as follows:

No maintenance plan: 3.5% per month x determined value (retail market value* as determined by Regulation)

Maintenance plan: 3.25% per month x determined value (retail market* value as determined by Regulation)

2.3.4 Medical aid contributions, expenses, and credits

The full medical scheme contribution made by the employer is taxed as a fringe benefit in the hands of the employee. The amount is then deemed to be medical scheme contributions made by the employee.

2.3.5 Residential accommodation

Where the employer provides free or cheap housing, the taxable value is determined on the actual cost to the employer or the amount determined according to a formula. In both cases the amount of any rentals paid by the employee will be
deducted from the amount calculated.

2.3.6 Holiday accommodation

The employee is taxed on the prevailing market rate per day if the property is owned by the employer or rented from an associated entity, or actual rental paid where the employer rented the accommodation and any amount chargeable in respect of meals, refreshments, or any services borne by the employer during which the accommodation was occupied by the employee.

2.3.7 Free or subsidised meals and refreshments

A taxable benefit arises if an employee has been provided with any meal, refreshment or voucher entitling him to any meal or refreshment for free or for a consideration which is lower than the value of the benefit.

No value is placed on the following benefits:

•  Provided in a canteen, cafeteria or dining room operated you or on behalf of the employer, and patronised wholly or mainly by employees.
• Supplied during business hours, extended working hours or on a special occasion.
• Enjoyed by an employee while providing entertainment on behalf of the employer.

2.3.8 Low interest or interest free loans

The fringe benefit is the difference between the interest rate charged by the employer and the official interest rate applied to the loan amount.

2.3.9 Long Service and Bravery Awards

Long service is an initial unbroken period of at least 15 years or any subsequent unbroken period of at least 10 years. R7 000 of the value of any award, excluding cash, is not subject to tax.

2.3.10 Uniform Allowance

An employer may provide a uniform to an employee or an allowance to purchase such uniform. No value is placed on the fringe benefit, provided that the employee is required to wear the uniform while on duty and it is clearly distinguishable from ordinary clothing.

2.3.11 Low-Cost Housing Transferred to Employee

No value is placed on interest-free or low interest loans granted solely to acquire fixed property or if fixed property is transferred to an employee where all of the following are applicable:

• The market value of the property does not exceed R450 000
• The employee’s annual remuneration does not exceed R250 000
• The employee is not a connected person in relation to the employer

2.4 Deductions

2.4.1 Contributions to pension, provident fund, and retirement annuity funds

With effect 1 March 2016 the tax deduction for contribution made to pension fund, provident fund and retirement annuity funds is a significantly amended. From 1 March 2016 onwards, the tax deduction for the three different funds, pension,
provident and retirement annuity funds will be identical.

2.4.2 Donations

Donations to certain public benefit organizations are deductible, limited to 10% of taxable income, before the deduction of donations and medical expenses and excluding any retirement lumpsum benefit. The taxpayer must be in receipt of a
qualifying section 18A donations certificate.

2.4.3 Travel expenses

For an individual to claim a deduction, a logbook must be maintained to justify business use. A logbook must contain at least the date of travel, destinations of travel, reasons for travel and the business kilometres travelled. Accurate records of the opening and closing odometer readings must be maintained.

2.4.4 Bursaries and scholarships

Bona fide scholarships or bursaries granted to enable any person to study at a recognised educational institution are exempt from tax. Where the benefit is granted to an employee, the exemption will not apply unless the employee agrees to reimburse the employer in the event that the studies are not completed.

1. Small Business Corporations

A small business corporation is a close corporation, private (other than a person service provider) or personality liability company of which.

• The entire shareholder or membership is held by natural personal for the entire year of assessment
• The gross income does not exceed R20 million during the year of assessment

2. Turnover Tax of Micro Business

Turnover tax of micro business is simplified turnover-based tax system. It substituted the income tax and capital
gains.

3. Bad and doubtful debt

Current year bad debts are deductible at 100%.
Doubtful debt
For years of assessment commencing 1 January 2019, the allowance is:
For Taxpayers Not Applying IFRS 9
• 40% of the face value of debts that are at least 120 days past due date.
• 25% of the face value of debts that are between 60 days and 120 days past due date.

1. Introduction

Expenditure of a capital nature is not deductible. In other words, if a person buys an asset such as a computer, delivery vehicle or machinery for use in the person’s business, the person is not allowed to deduct the cost of such an asset for tax purposes. However, special allowances in the Income Tax Act 58 of 1962 (the Act) provide that the costs of fixed assets can be deducted over a period of time. These special allowances make provision for the fact that the value of an asset depreciates over time.

2. Wear and tear

The wear-and-tear allowances may be used for assets which did not qualify for allowances in any of the other capital allowance sections. The allowance will be granted as long as the asset is used for purposes of the taxpayer’s trade. The wear-and-tear allowance is not applicable to buildings or structures of a permanent nature.

Plant and machinery

New or unused manufacturing assets

Depreciated over 4 years as follows:

40%:20%:20%:20%

Plant and machinery

Used manufacturing assets

Depreciated over 5 years as follows:

20%:20%:20%:20%:20%

Small Business Corporation
Plant and machinery

Plant or machinery brought into use for first time

100%

Non-manufacturing assets

Acquired on or after 1 April 2005

Depreciated over 3 years as follows:

50%:30%:20%