Exempt Income-Incentivising Investment

Exemptions from Gross Income

What is the Definition of “Income”?

The amount of gross income remaining after the exclusion of any amounts exempt from normal tax for any year of assessment

Where is “Income” defined in tax legislations"?

In Section 1 of the Income Tax Act 58 of 1962

What is Exempt Income?

Amounts received or accrued that have been included in Gross Income that are not subject to normal tax

What are the 6 Exemption Categories?

1. Those incentivising Investment

2. Those related to Dividends

3. Those related to Employment

4. Those incentivising Education

5. Those aimed at amounts subject to Withholding Tax

6. Other Exemptions

What are the 4 exemptions that incentivise investment?

1. Interest received by natural persons

2. Interest received by non-residents

3. Amounts received from tax free investments

4. Purchased Annuities

What section applies exemption for interest received by natural persons?

Section 10 (1) (i)

Who qualifies for a s10(1)(i) exemption and how much is exempt?

Natural persons < (incl.) 65 are exempt of local interest worth R 23 800 first received

Natural persons > 65 are exempt of local interest worth R 34 500 first received.

What does the s10(1)(i) NOT apply to?

Interest received in respect of tax free investments

Who is the s10(1)(i) exemption NOT available for ?

Non-Natural Persons (Companies and Trusts)

How is the s10(1)(i) exemption applied if the year of assessment is < 12 months?

The interest exemption is apportioned

What section applies exemption for interest received by non-residents?

Section 10 (1) (h)

What interest is included in a non-resident’s gross income?

Local Interest(Interest received from a South African Source)

What are the exceptions to the s10(1)(h) exemption?

The exemption does not apply if:

1. a natural person is physically in Sa for over 183 days(in total) during the period before the interest was received

2. any other person(incl. companies & trusts) if the debt the interest arises from is connected to a permanent establishment of that person

What is a Permanent Establishment?

A fixed place of business, for example a branch or factory

What section applies exemption for amounts received from tax free investments?

Section 12 T

What is the definition of a Tax Free Investment and where is it defined?

• It is a financial instrument or a policy owned by a natural person and administered by a person designated by the Minister of Finance

• It is defined in s12T(1)

Who do tax free exemptions need to be owned by?

A natural person or a deceased or insolvent estate of a natural person

What happens with a tax free investment for CGT purposes?

The capital gains or loss from the disposal of a tax free investment is disregarded

What are the tax free investment contribution limits?

• Annual Contribution limit of R 36 000 per natural person

• Lifetime Contribution limit of R 500 000

What are the Contribution Limits in relation to s12T NOT affected by when determining if it they have been exceeded?

• Amounts received or accrued that are re-invested

• Any transfers of amounts between different tax free investments

What will any transfer of tax free investments to another individual be deemed as in terms of s12T?

They will be deemed a contribution and are subject to the contribution limitations of the recipient

What happens if a taxpayer exceeds the contribution limits in relation to s12T?

They will be penalised by having 40% of the excess contribution being deemed as Normal Tax Payable

What happens to the returns from tax free investments held by deceased or insolvent estates of a person?

They will continue to be exempt from income and dividends tax

What section applies exemption for Purchased Annuities?

Section 10A

What is the general rule in terms of s10A?

The capital portion of amounts received as an annuity is exempt from normal tax[s10A(2)]

Who does not qualify for the s10A exemption?

Companies that purchase annuities

Who are the provisions of s10A applicable to?

Only Natural Persons

What does the s10A exemption apply to?

The capital portion of an annuity amount payable to a purchaser, their spouse or surviving spouse as per the definition of annuity contract

What types of annuities don’t qualify for the s10A exemption?

Retirement Annuity Funds

Pension Funds

Pension Preservation Fund

Provident Fund

Provident Preservation Fund

Services Rendered

Consideration for disposal of a business, asset or right inherited

Donated Annuities

What annuities qualify for the s10A exemption?

Those purchased from an insurer for a lump sum cash consideration

What formula is used to calculate the capital element of a purchased annuity and what does each component stand for?

Y=A/B *C

Y=Capital Amount/Exempt Amount

A=Total Cash Consideration paid by purchaser

B=Total Expected Returns

C=Actual annuity amount received or accrued

For the purpose of calculating the expected return or the probable number of years the annuity amounts will be paid what will be used for guidance?

A Mortality Table

Which age is applied when calculating the the capital element of an annuity for a person?

Their age on their birthday immediately before the commencement of the annuity contract

What formula is used to calculate the capital element of a purchased annuity on commutation(amendment or change) or termination and what does each component stand for?

X=A-D

X=Exempt amount

A=Total cash consideration paid by the purchaser

D=sum of the previously exempt capital element of all annuities received or accrued prior to commutation or termination[s10A(3)(c]