ch5 exempt income
Saturday, 30 March 2024 14:31
outcomes of this chapter:
- identify amounts, that were incl. in gross income, that are exempt from normal tax
- apply the qualifying criteria to determine whether certain amounts are exempt from normal tax
- explain why certain amounts exempt from normal tax
overview (structure) of exempt income in SILKE
SILKE included page #
5.1. introduction p.80
5.2. exemptions incentivising investments p.81
5.3. exemptions relating to dividends p.90
5.4. exemptions relating to employment p.101
5.5. exemptions that incentivise education p.108
5.10. exemptions aimed at amounts that are subject to withholding tax p.123
5.11. other exemptions p.124
5.1. fundamentals (introduction) of exemptions [SILKE p.80]
the income of a tp is the amount of his gross income remaining after excl. of any amounts exempt from normal tax for yoa. income is therefore
calc. as follows:
gross income xxx
less: exempt income - s10; s12 (xxx)
subtotal 1 - income xxx
exempt income refers to amounts received/accrued and that have been incl. in gross income, that are not subject to normal tax:
▪ you must incl. an amount in gross income, even if the full amount/portion thereof will qualify for an exemption
▪ you must incl. the gross amount in gross income & then exempt the amount (if applicable) BUT do not incl. net gross income
▪ majority of exemptions are contained in s10 of the act
5.2. exemptions incentivising investments [SILKE p.81]
the following types of investment income are exempt from normal tax:
(1) interest received by natural persons
(2) interest received by non-residents
(3) amounts received from tax free investments
(4) purchased annuities
(5) exemption of non-deductible element of qualifying annuities
(6) collective investment schemes
(7) proceeds from insurance policies
(8) approved funds and associations
5.2.1. interest received by natural persons [SILKE p.81]
▪ where a natural person receives interest from a source in south africa, the following amounts qualify for an exemption:
▫ where the person is <65 yrs the first R23 800 interest that the person received during the year; or
▫ where the person is ≥65 yrs the first R34 500 interest that the person received during the year
▪ this exemption does not apply to interest received from a tax-free investment & is also not applicable to non-natural persons
(companies, or trusts)
5.2.2. interest received by non-residents [SILKE p.81]
▪ only interest that is received from a south african source will be incl. in a non-resident's gross income
▫ the source of interest is in south africa if the interest is paid by a resident, or is received/accrued i.r.o. any funds used/applied by
any person in south africa
▫ interest received by a non-resident is exempt from normal tax, subject to the exceptions mentioned in s10(1)(h)
▫ interest received by a non-resident is, however, not tax-free since it may be subject to the 15% withholding tax on interest
▫ the rate of the withholding tax on interest may be reduced by a double tax agreement (south africa & other country)
▪ exceptions, where the normal tax exemption does not apply, are
▫ in the case of a natural person
- who was physically present in south africa for a period exceeding 183 days in total during the 12-month period preceding
the date on which the interest is received by/accrues to that person
- if the debt from which the interest arises is effectively connected to a permanent establishment of that person in south
africa
▫ in the case of any other person (incl. companies/trusts)
- if the debt from which the interest arises is effectively connected to a permanent establishment of that person in south
africa
▪ permanent establishment = fixed place of business (e.g., branch/factory)
5.2. exemptions incentivising investments: 5.2.1. & 5.2.2. summarised
5.2.1. interest received by natural persons 5.2.2. interest received by non-residents
ch5 Page 1
, 5.2.1. interest received by natural persons 5.2.2. interest received by non-residents
available to resident & non-resident natural persons non-residents
in respect of interest received, or accrued from a south african source interest received, or accrued from a south african source
extent of partial :. depends on taxpayer's age full amount
exemption ▫ ≥ 65 yrs R34 500
▫ < 65 yrs R23 800
exemption is i.r.o. interest received i.t.o. a tax-free investment as ▫ s10(2)(b): if the interest takes the form of an annuity
not applicable defined in s12(T) ▫ s10(1)(h)(i): if the non-resident is physically present in south
africa for > than 183 days in 12 months before the interest
will be received, or accrued to
▫ s10(1)(h)(ii): if the interest arises from a debt connected to a
permanent establishment of any non-resident in south africa
therefore it will be exempt i.t.o. s10(1)(h), if ≥ 183 days in south
africa & the debt is not connected to a permanent establishment
in south africa
5.2.3. amounts received from tax-free investments - s12T [SILKE p.82]
a tax-free investment is a financial instrument, or a policy owned by a natural person and administered by a person designated by the Minister
of Finance
applicable to: natural persons
exemption • s12T(2) exempts from normal tax, any amounts received i.r.o. the tax-free investment
• s12T(3) excl. any capital gain, or capital loss i.r.o. the disposal of the tax-free investment
investment limit i.t.o. s12T(4) • R 36 000 p.a.; AND
• R500 000 per lifetime
• >1 tax-free investment allowed
• annual & lifetime limit ≠ affected by reinvestments, or transfers (s12T(5) & s12T(6))
if invested > than investment *
limit (s12T(7)(a) and (b))
*service providers may no longer accept contributions over & above the limitations
note the scenario will state whether or not the investment is a tax-free investment i.t.o. s12T
5.2.4. purchased annuities - s10A [SILKE p.84]
▪ general rule: amounts received as an annuity are incl. in gross income, however, the capital portion of the certain annuities are in some
cases exempt from normal tax
▫ this exemption ensures that the capital payment made by an investor when purchasing a life annuity is not subject to normal tax
when the amount is paid back
▫ a company purchasing an annuity does not qualify and the provisions are only applicable to natural persons
▪ a purchaser is:
▫ any natural person; or
▫ a curator bonis of any natural person
▪ an annuity amount is an amount payable by way of annuity under an annuity contract and any amount payable in consequence of the
commutation/amendment/change/termination of an annuity contract
▪ annuity contract = agreement concl. between an insurer and a purchaser & it needs to meet the following requirements:
▫ insurer agrees to pay the purchaser an annuity until the death of the purchaser
▫ purchaser agrees to pay the insurer a lump sum cash consideration for the annuity
▫ no amounts are/will be payable by the insurer to the purchaser, or any other person than amounts payable by way of the
expected annuity
5.4. exemptions relating to employment [SILKE p.101]
employers often grant benefits or allowances to their employees to enable them to perform their duties as employees. where a non-cash
benefit is granted to an employee, the taxable benefit should be determined in terms of the 7th schedule and inc. in the employee's gross
income.
5.4.1. foreign pensions - s10(1)(g(C)) [SILKE p.101]
any foreign pension, annuity, or lump sum will be incl. in the gross income of a resident. these foreign pensions, annuities & lump sums are
exempt from normal tax in the hands of the resident, if received or accrued from…
▪ the social security system of any foreign of any foreign country, or,
▪ a source outside the south africa as compensation for past employment outside south africa
therefore, where amounts are received from foreign funds:
▪ the whole amount is incl. in the gross income of a resident
▪ an apportionment of exemption must be made if services were rendered both inside and outside south africa
5.4.2. unemployment insurance benefits - s10(1)(m(B)) [SILKE p.102]
▪ any benefit or allowance payable i.t.o. the unemployment insurance act is exempt from normal tax
▪ this act stipulates that both the employee and the employer have to make contributions to the unemployment insurance fund
▪ if the employee subsequently loses their job can claim unemployment benefits for a prescribed period of time from the fund
ch5 Page 2
Saturday, 30 March 2024 14:31
outcomes of this chapter:
- identify amounts, that were incl. in gross income, that are exempt from normal tax
- apply the qualifying criteria to determine whether certain amounts are exempt from normal tax
- explain why certain amounts exempt from normal tax
overview (structure) of exempt income in SILKE
SILKE included page #
5.1. introduction p.80
5.2. exemptions incentivising investments p.81
5.3. exemptions relating to dividends p.90
5.4. exemptions relating to employment p.101
5.5. exemptions that incentivise education p.108
5.10. exemptions aimed at amounts that are subject to withholding tax p.123
5.11. other exemptions p.124
5.1. fundamentals (introduction) of exemptions [SILKE p.80]
the income of a tp is the amount of his gross income remaining after excl. of any amounts exempt from normal tax for yoa. income is therefore
calc. as follows:
gross income xxx
less: exempt income - s10; s12 (xxx)
subtotal 1 - income xxx
exempt income refers to amounts received/accrued and that have been incl. in gross income, that are not subject to normal tax:
▪ you must incl. an amount in gross income, even if the full amount/portion thereof will qualify for an exemption
▪ you must incl. the gross amount in gross income & then exempt the amount (if applicable) BUT do not incl. net gross income
▪ majority of exemptions are contained in s10 of the act
5.2. exemptions incentivising investments [SILKE p.81]
the following types of investment income are exempt from normal tax:
(1) interest received by natural persons
(2) interest received by non-residents
(3) amounts received from tax free investments
(4) purchased annuities
(5) exemption of non-deductible element of qualifying annuities
(6) collective investment schemes
(7) proceeds from insurance policies
(8) approved funds and associations
5.2.1. interest received by natural persons [SILKE p.81]
▪ where a natural person receives interest from a source in south africa, the following amounts qualify for an exemption:
▫ where the person is <65 yrs the first R23 800 interest that the person received during the year; or
▫ where the person is ≥65 yrs the first R34 500 interest that the person received during the year
▪ this exemption does not apply to interest received from a tax-free investment & is also not applicable to non-natural persons
(companies, or trusts)
5.2.2. interest received by non-residents [SILKE p.81]
▪ only interest that is received from a south african source will be incl. in a non-resident's gross income
▫ the source of interest is in south africa if the interest is paid by a resident, or is received/accrued i.r.o. any funds used/applied by
any person in south africa
▫ interest received by a non-resident is exempt from normal tax, subject to the exceptions mentioned in s10(1)(h)
▫ interest received by a non-resident is, however, not tax-free since it may be subject to the 15% withholding tax on interest
▫ the rate of the withholding tax on interest may be reduced by a double tax agreement (south africa & other country)
▪ exceptions, where the normal tax exemption does not apply, are
▫ in the case of a natural person
- who was physically present in south africa for a period exceeding 183 days in total during the 12-month period preceding
the date on which the interest is received by/accrues to that person
- if the debt from which the interest arises is effectively connected to a permanent establishment of that person in south
africa
▫ in the case of any other person (incl. companies/trusts)
- if the debt from which the interest arises is effectively connected to a permanent establishment of that person in south
africa
▪ permanent establishment = fixed place of business (e.g., branch/factory)
5.2. exemptions incentivising investments: 5.2.1. & 5.2.2. summarised
5.2.1. interest received by natural persons 5.2.2. interest received by non-residents
ch5 Page 1
, 5.2.1. interest received by natural persons 5.2.2. interest received by non-residents
available to resident & non-resident natural persons non-residents
in respect of interest received, or accrued from a south african source interest received, or accrued from a south african source
extent of partial :. depends on taxpayer's age full amount
exemption ▫ ≥ 65 yrs R34 500
▫ < 65 yrs R23 800
exemption is i.r.o. interest received i.t.o. a tax-free investment as ▫ s10(2)(b): if the interest takes the form of an annuity
not applicable defined in s12(T) ▫ s10(1)(h)(i): if the non-resident is physically present in south
africa for > than 183 days in 12 months before the interest
will be received, or accrued to
▫ s10(1)(h)(ii): if the interest arises from a debt connected to a
permanent establishment of any non-resident in south africa
therefore it will be exempt i.t.o. s10(1)(h), if ≥ 183 days in south
africa & the debt is not connected to a permanent establishment
in south africa
5.2.3. amounts received from tax-free investments - s12T [SILKE p.82]
a tax-free investment is a financial instrument, or a policy owned by a natural person and administered by a person designated by the Minister
of Finance
applicable to: natural persons
exemption • s12T(2) exempts from normal tax, any amounts received i.r.o. the tax-free investment
• s12T(3) excl. any capital gain, or capital loss i.r.o. the disposal of the tax-free investment
investment limit i.t.o. s12T(4) • R 36 000 p.a.; AND
• R500 000 per lifetime
• >1 tax-free investment allowed
• annual & lifetime limit ≠ affected by reinvestments, or transfers (s12T(5) & s12T(6))
if invested > than investment *
limit (s12T(7)(a) and (b))
*service providers may no longer accept contributions over & above the limitations
note the scenario will state whether or not the investment is a tax-free investment i.t.o. s12T
5.2.4. purchased annuities - s10A [SILKE p.84]
▪ general rule: amounts received as an annuity are incl. in gross income, however, the capital portion of the certain annuities are in some
cases exempt from normal tax
▫ this exemption ensures that the capital payment made by an investor when purchasing a life annuity is not subject to normal tax
when the amount is paid back
▫ a company purchasing an annuity does not qualify and the provisions are only applicable to natural persons
▪ a purchaser is:
▫ any natural person; or
▫ a curator bonis of any natural person
▪ an annuity amount is an amount payable by way of annuity under an annuity contract and any amount payable in consequence of the
commutation/amendment/change/termination of an annuity contract
▪ annuity contract = agreement concl. between an insurer and a purchaser & it needs to meet the following requirements:
▫ insurer agrees to pay the purchaser an annuity until the death of the purchaser
▫ purchaser agrees to pay the insurer a lump sum cash consideration for the annuity
▫ no amounts are/will be payable by the insurer to the purchaser, or any other person than amounts payable by way of the
expected annuity
5.4. exemptions relating to employment [SILKE p.101]
employers often grant benefits or allowances to their employees to enable them to perform their duties as employees. where a non-cash
benefit is granted to an employee, the taxable benefit should be determined in terms of the 7th schedule and inc. in the employee's gross
income.
5.4.1. foreign pensions - s10(1)(g(C)) [SILKE p.101]
any foreign pension, annuity, or lump sum will be incl. in the gross income of a resident. these foreign pensions, annuities & lump sums are
exempt from normal tax in the hands of the resident, if received or accrued from…
▪ the social security system of any foreign of any foreign country, or,
▪ a source outside the south africa as compensation for past employment outside south africa
therefore, where amounts are received from foreign funds:
▪ the whole amount is incl. in the gross income of a resident
▪ an apportionment of exemption must be made if services were rendered both inside and outside south africa
5.4.2. unemployment insurance benefits - s10(1)(m(B)) [SILKE p.102]
▪ any benefit or allowance payable i.t.o. the unemployment insurance act is exempt from normal tax
▪ this act stipulates that both the employee and the employer have to make contributions to the unemployment insurance fund
▪ if the employee subsequently loses their job can claim unemployment benefits for a prescribed period of time from the fund
ch5 Page 2
