Taxation 388

SILKE: CHAPTER 4
SPECIAL INCLUSIONS

Lecturer: Prof Linda van Heerden

References to exempt income and deductions in SILKE – work covered later

 Special inclusions
SILKE: Chapter 4
Learning Outcomes
After studying this chapter, you should be able to:
• Identify or explain which amounts should be included in ‘gross income’, even
though they may be of a capital nature and support your opinion with the relevant
authority; and
• Demonstrate your knowledge in a practical case study (both in a practical calculation
question and a theoretical advice question)

Preparation
• Read chapter 4 of SILKE
• Create your own summaries

The lecturer will lead and facilitate the class discussion of the prescribed material. The
lecturer will assume that students have worked through the relevant chapter prior to the
lecture and the class discussion will proceed from this basis.

Caveat
This PowerPoint presentation is the lecturer’s teaching aid and does not replace your
prescribed course material (textbook and Act). This presentation must not be treated as
a summary of the prescribed work.
 Please take note:

1. Remember that the greyed-out sections in SILKE do not form part of SAICA’s
“examinable pronouncements” or of Taxation 388.
2. SILKE examples: self-study

All references to paragraphs in these slides, refer to the paragraphs of the

definition of ‘gross income’ in section 1(1) of the Income Tax Act.

Abbreviations used:
TP - Taxpayer • For slides
ITA – Income Tax Act • Clearly indicate in
LB – Labour Broker assessment (Key)
PSP – Personal Service Provider
PSC – Personal Service Company
PST – Personal Service Trust
GI – Gross income
 Overview of the Special inclusions
Paragraph Included Note
Par (a) Annuities
Par (b) Maintenance payments
Par (c) Services
Par (cA) & Restraint of trade
(cB)
Par (d) Services: Compensation for termination of employment

Par (e) & Fund benefits Ignore Silke

(eA) 4.7
Par (f) Services: Commutation of amounts due
Par (g) Lease premiums
Par (gA) Compensation for imparting knowledge and information
Par (h) Leasehold improvements

4
 Overview of the Special inclusions

Paragraph Included Note

Par (i) Fringe benefits
Par (jA) Proceeds from the disposal of certain assets
Par (k) Dividends
Par (I) Subsidies and grants Ignore Silke 4.15
Par (lA) Amounts received by or accrued to sporting Ignore Silke 4.16
bodies
Par (lC) Government grants Ignore Silke 4.17
Par (m) Key-man insurance policy proceeds Ignore Silke 4.18
Par (n) Amounts deemed to be receipts or accruals and
s 8(4) recoupments

5
Section 23L(2): Ignore SILKE 4.20 for Taxation 388 purposes
GROSS INCOME =
General
definition
+
Specific
inclusions
 • General definition clearly indicates amounts of a capital nature are excluded from GI
• Certain amounts in certain paragraphs of the specific inclusions may be capital in nature
but are still included in GI
• Amounts must still be “received or accrued”

7
This excerpt of the Act is only in the lecturer’s slides
 4.1 Special inclusions fundamental
principles

• Par (a) – (n) of the definition of ‘gross income’, section 1(1) of

the ITA, includes certain amounts in gross income, even
though they may be of capital nature.

• These receipts or accruals are referred to as the specific

inclusions.
• The specific inclusions do not limit the scope of the gross
income definition and therefore items not specifically included
under par (a)-(n) can still be included in gross income by virtue
of the ‘general definition’ but specific inclusion enjoy priority
Special inclusions (par (a)-(n)) takes priority over the general definition
(similar to section 23B(3) in respect of double deductions)

THEREFORE:
STEP 1: Check if amount is included in GI through special inclusions IF
NOT, then
STEP 2: Determine if the amount complies with all the requirements of
the general GI definition

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4.2 Annuities
• Par (a) of the definition of ‘gross income’, section 1(1) of the ITA
• excludes par d(ii) amounts (all amounts received from employer-owned
policies of insurance) – NOT for TAX 388

Definitions:
• Annuity = See characteristics in Hogan case
• Life or living annuity = receive annuity from retirement fund after retirement
(Chapter 9) NOT for Tax 388
• Annuity amount = payable i.t.o. annuity contract or conversion/termination of
contract (s 10A – do later – buy contract from insurer)

• The term ‘annuity’ not defined in the Act: Hogan case (be able to identify)
Characteristics of an annuity:
• Annual payment (can be divided into instalments);
• Repetitively payable from year to year, at any rate for a certain period; and
• Contractually chargeable against some person.
This excerpt of the Act is only in the lecturer’s slides
 4.2 Annuities
• Source of annuity: country where contract was concluded

Sign contract in RSA = RSA source Sign contract outside RSA = Not RSA source
GI for resident & non-resident GI for resident

• Examples of how an annuity may arise:

• purchased from an insurance company;
• contractual obligation i.t.o. a trust or otherwise;

Examples of amounts that are not annuities:

• Voluntary payments, even if made regularly, cannot be annuities →
someone must be obligated to pay
• Settlement of debt in annual instalments
 4.3 Maintenance payments

This excerpt of the Act is only in the lecturer’s slides

• Par (b) of the definition of ‘gross income’, section 1(1) of the ITA
• Payments from MIR → s 7(11) NOT for TAX 388
• Payments from after-tax income of spouse/former spouse:
i. Alimony or allowance or maintenance of a TP i.t.o. a judicial order / written
agreement of separation / order of divorce; or
ii. Once-off and periodical maintenance amount of a child i.t.o a
maintenance order

NB! Par (b) inclusion for the receiving spouse but remember s 10(1)(u)
exemption (Silke 5.11.1)

Sign contract in RSA = RSA source Sign contract outside RSA = Not RSA source
GI for resident & non-resident GI for resident
4.4 Services
• Par (c) of the definition of ‘gross income’,
section 1(1) of the ITA
• Amounts received / accrued in respect of:
• In respect of = Causal relationship between amount received and services
rendered
• Services rendered or to be rendered (including any voluntary awards) – waiter,
makup artist, sole proprietorship; or Not only EE/ER relationship
• Employment or the holding of an office (but not s 8(1) or 8C amounts) –
employee, director
• When is it taxable?
In the year in which the amount is received / accrued, whichever happens first,
irrespective of the period to which the services relate.

TP is taxed on the WHOLE amount on the earlier of See 2 viewpoints on p 64/5

when he receives it or it accrues: service may have Silke regarding meaning of
already been rendered in previous year OR must still words ‘other than…’ (Link
be rendered when C 8 is done)
 4.4 Services
• Proviso (i): Par (c) does not apply to par (i) taxable (fringe) benefits
 [par (i) overrides par (c)]
If the Seventh Schedule excludes the benefit as a taxable benefit → can possibly
be gross income in terms of par (c)
If the Seventh Schedule includes the benefit at no (zero) value → par (i) is
applicable and par (c) cannot apply
See different schedules from p.203. Will do Seventh schedule in Chapter 8
• Proviso (ii) (anti-avoidance provision)  amount received by a person (A) for
services rendered by another person (B) is specifically included in gross income of
the person who rendered the services (B). (Work for US -> Ask that salary be paid in
husbands bank account?)
• Section 57B not for TAX 388

Source principles for services rendered: source = place where services are rendered (C 21.3.6)
Residents: Services rendered worldwide is GI
Non-residents: Services rendered in RSA is GI
REMEMBER: if it is a director, then source is at the head office of the company
 4.4 Services

Long service awards

• Practice of employers is to grant employees awards in recognition of long
service
• Seventh Schedule: Non-cash awards
• From 1 March 2022 it can include cash awards
• Aggregate amount of all four benefits not exceeding R5 000 is not
included in GI

NB!!! Please note that accumulated leave pay-outs are included in terms of
par (c) and not in terms of par (d) – lumpsum received.

Accumulated leave payment directly linked to TP’s services and

employment
15
 4.5 Restraint of trade
• Par (cA) and (cB) of the definition of ‘gross income’, section 1(1) of the ITA

Restraint of trade payment: Payment for restriction or loss of the

right to trade freely or to provide certain services or professions within
a specific area for a specific period.

• Right to trade freely = capital asset (refer to SILKE 3.6.19)

• Restraint of trade payment = capital in nature (but still gross income

because specific inclusion)

This excerpt of the Act is only in the lecturer’s slides

 4.5 Restraint of
trade
This excerpt of the Act is only in the lecturer’s slides

• Par (cA): person is a LB or PSP / PSC / PST: any restraint of trade payment
(will say that it is a LB or PSP / PSC / PST)

• Par (cB): person is a natural person : receives a restraint of trade payment

in respect or by virtue of
• Any past, present or future employment or
• The holding of an office.
Taxed fully in year it is received = regardless of
how long trade restriction applies
 4.5 Restraint of trade

• What about restraint of trade payments received by:

• Companies/trusts that are not PSCs/PSTs etc.?
• Natural persons that conduct businesses as sole proprietors?

Common law source principles:

1. What is originating cause?
2. Where is cause located?

Relates to services
 4.6 Services: compensation for
termination or variation of
Annuities employment
• Par (d) of the definition of ‘gross income’, section 1(1) of the ITA
 4.6 Services: compensation for
termination or variation of
employment
annuities

• Excludes par (a), therefore in effect applies to lump sums

(except i.r.o par (d)(ii)) Par (d)(ii) and (d)(iii) NOT FOR TAX 388

• Par (d)(i): Relinquishment, termination, loss, repudiation,

cancellation or variation in office / employment from employer
or associated institution  possible severance benefit
(included in column 1)? (see slides 22 and 23 and the
additional Word document)
Employer is not a fund

• Proviso (bb): Amount payable after death; deemed accrual to

employee immediately before death
4.6 Services: compensation for termination or
variation of employment

NB! Includes
voluntary awards

Remember source principles related to services

rendered:
• Residents: services rendered worldwide = GI
• Non-residents: services rendered in RSA = GI
 4.6 Amount
Services:
always a compensation for termination or
variation
lumpsum, but different tax of employment
implications

• Severance benefit = par (d)(i) lump sum

received from an employer who is not a
fund if one of the following requirements
are met:

a) Person has reached the age of 55; or

b) Person became permanently

incapable to continue employment
due to sickness, accident, injury etc.;
or

c) Person’s employer ceased trade /

employee has become redundant
(NB! If the employee at any time held
more than 5% shares in the ER
(company) and received the lump sum
due to the person’s employer ceasing
trade or the employee becoming
4.6 Services: compensation for termination or
variation of employment
Severance benefits, although included in gross income, are
subject to tax in terms of a different tax table

Does it comply with the severance How is tax calculated in accordance with the
benefit requirements per SB definition subtotal method for natural persons?
& par (d)(i)?
NO GI column 3  progressive tax table

YES GI column 1  separate tax table for

severance benefits

Tax table for severance benefits: see pg. 284 of Act

Please refer to additional Word document

explaining severance benefits
Lecture 2

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4.8 Services: Commutation Of Amounts Due
• Par (f) of the definition of ‘gross income’, section 1(1) of the ITA (of
limited use due to the wide scope of par (d)

• “Commutation” = substitution

• One type of amount due in terms of a contract of service or

employment is substituted for another type
• Par (f) amounts can also be a SB

Example:
 An employee may substitute his right in terms of his service
agreement to be given notice before the termination of his services
for a cash payment.
Wording: Par (d) vs Par (f)
Any contract of employment or service vs Any office or employment
25
This excerpt of the Act is only in the lecturer’s slides
 4.9 Lease premiums
• Par (g) of the definition of ‘gross income’, section 1(1) of the ITA

This excerpt of the Act is only in the lecturer’s slides

 4.9 Lease premiums
Distinguish from rent, rental deposit and upfront rental receipt:
Rent = received for use of asset
Rental deposit = received upfront to cover potential losses, normally refundable
Upfront rental receipt = bullet rental and is for use or right of use and is rent

• What are lease premiums?

• Amounts paid by the lessee to the lessor, whether in cash or otherwise,
for the use (or right of use) of certain assets distinct from and in
addition to, or instead of, rent (Butcher Bros).
• Must have an ascertainable monetary value.
 4.9 Lease premiums

• Whole amount included in gross income of lessor in YOA

received / accrued:
• do not spread over the lease term.

Use source principles for rental income because linked to

rental contract: : See Silke 21.3.4
What is the originating cause and where is it located?
Focus either on
1. Where business is situated
2. Where is asset being used
 4.9 Lease premiums
Source: Interpretation Note 109

29
Self study
 4.9 Lease premiums

30
Self study
 4.11 Leasehold improvements

• Par (h) of the definition of ‘gross income’,

section 1(1) of the ITA

• Improvement – an addition or alteration

which increases the quality or value of something’

• The value of improvements effected by the lessee in terms of a contract on

the land or to the buildings of the lessor (owner) is included in the lessor’s
gross income.

Requirements:
Lessor must have a right to have the improvements effected to his property
an agreement must exist where the lessee has a legal enforceable obligation to
effect the improvements.

Remember source principles: See Silke 21.3.4

This excerpt of the Act is
What is the originating cause and where is it located?
only in the lecturer’s slides
 4.11 Leasehold improvements
When included?
• Date of accrual: when lease agreement is signed
• If amount is not specified in lease agreement: accrual upon
completion of the improvement because the amount can
only be determined at this point in time. (IN 110)

Amount included?
i. Amount specified in the agreement
ii. If no amount specified or if only a specified minimum
amount is stated or if a specified building must be erected
 the fair and reasonable value of the improvement.
• Fair and reasonable value depends on circumstances,
however in most cases the cost of the improvements (will be
given).
 4.11 Leasehold improvements
What happens if lessee voluntarily spends more?
• Only the amount specified in the agreement is included in gross income of lessor.
• The lessee can spend more than the stipulated amount, but the excess is voluntary
expenditure which is not part of the right to have improvements effected that
accrued to the lessor under paragraph (h).

What happens if the lessee spends less than the stipulated amount?
• Amount stipulated in the agreement must still be included in the lessor’s gross
income.
 4.11 Leasehold improvements

Class example: which amount should be included in gross income?

Amount stipulated in Agreement Lessee spends

100 000 80 000

100 000 100 000

100 000 120 000

none As long as it is fair and reasonable 120 000

Minimum value of 100 000 (for 180m2 theatre) 120 000

As long as it is fair and

reasonable for specified building

Self study
4.10 Compensation For Imparting
Knowledge And Information

• Par (gA) of the definition of ‘gross income’, section 1(1) of the ITA

• Imparting = disclosing or communicating

• Also includes rendering of assistance / service in connection with the application /

utilisation of knowledge / information

• Fully taxable in year of accrual or receipt.

• The imparting of information must be distinguished from the sale of copyrighted

written material. The latter is not the ‘imparting’ of information unless the written
material is provided as part of a training course. This excerpt of the Act is
only in the lecturer’s slides
 4.12 Fringe benefits
• Par (i) of the definition of ‘gross income’, section 1(1) of the ITA.

• Benefits and advantages received by employee from employer

which do not consist of cash / cannot be turned into money

• Cash equivalent is included in gross income – calculation of cash

equivalent determined by 7th Schedule.
Must determine CE
yourself (after C 8),
• Par (i) benefit / advantage is not subject to par (c) but for A1S1 amount
can be given

• Fringe benefits will be covered in Chapter 8

Source principles for services rendered: source
= place where services are rendered (C 21.3.6)

This excerpt of the Act is only in the lecturer’s slides

4.13 Proceeds from the sale of certain
assets
• Par (jA) of the definition of ‘gross income’, section 1(1) of the ITA

• Disposal of any asset manufactured, produced, constructed or

assembled

• that is similar to any trading stock used for the purposes of

manufacture, sale or exchange

Example  Manufacturer of motor vehicles (demo models)

Remember source principles: Silke 21.3.5
Section 9(2)(j) or 9(2)(k)

This excerpt of the Act is only in the lecturer’s slides

 4.14 Dividends

• Par (k) of the definition of ‘gross income’, section 1(1) of the ITA

• All Local and foreign dividends are included in gross income

Source principles of dividends? (Silke 21.3.1)

Residents: Dividends from RSA and foreign companies = GI
Non-Residents: Dividends from RSA companies = GI

This excerpt of the Act is only in the lecturer’s slides

4.19 Amounts required to be included
in taxpayers ‘income’

• Par (n) of the definition of ‘gross income’, section 1(1) of the ITA

• Include all amounts in gross income that are specifically included

in a TPs ‘income’ through other provisions of the ITA

• These amounts are further deemed to have been received by or

accrued to the TP

• Examples:
• Ss 7(2) and 7(3) – Chapter 7
• S 8C – Chapter 8

This excerpt of the Act is only in the lecturer’s slides