TAX3701: Taxation of Individuals Study Notes (UNISA BCom Taxation)

These study notes provide a structured, exam-focused guide to TAX3701: Taxation of Individuals for UNISA BCom Taxation and related qualifications. The focus is on the South African income tax system as it applies to natural persons, with particular emphasis on issues typically examined in UNISA TAX3701, CUT Diploma in Taxation modules, and similar courses at South African universities.

1. South African Income Tax Framework for Individuals

1.1 Residence, Source, and the Tax Base

South Africa operates a residence-based tax system. This is the starting point for almost every TAX3701 exam question.

Key principle:

• Residents are taxed on worldwide income.
• Non-residents are taxed only on South African–source income.

To apply this correctly in exams, always determine:

1. Is the person a resident?
2. What is the nature and source of each amount?
3. Is there a specific inclusion, exemption, or allowance?

1.1.1 Definition of “Resident”

For natural persons, “resident” has two alternative tests:

1. Ordinarily resident test (common-law test).
2. Physical presence test (statutory test).

If a person meets either test, they are a resident, unless the “tie‑breaker” clause in a double taxation agreement (DTA) deems them resident elsewhere.

Ordinarily resident test (most important in practice):

• A person is ordinarily resident where their true home is – where they return to from overseas trips, with a degree of permanence.
• Factors considered:
  • Where the family lives.
  • Where the person intends to settle in the long term.
  • Location of fixed property (e.g. primary home).
  • Country of citizenship (not decisive, but relevant).
  • Duration and purpose of absences and visits.

Physical presence test: Applies if the person is not ordinarily resident, but is physically present in South Africa for:

• More than 91 days in the current year of assessment, and
• More than 91 days in each of the five preceding years, and
• More than 915 days in total during those five preceding years.

If all three are met, the person becomes a resident from the first day of the current year of assessment (e.g. 1 March).

There is also a “break in physical presence” rule:

• If the person is out of South Africa for a continuous period of at least 330 full days, starting when they leave, they cease to be resident in terms of the physical presence test from the day they left.

Exam tip (TAX3701 style):
In a typical question, you might be told someone (e.g. Thabo) worked in Dubai and came back to South Africa for specific periods. You must calculate days carefully for each year. Use a simple tabular approach for clarity.

1.1.2 Non-Resident Individuals

A non-resident is an individual who is not a resident under either test. Non-residents are taxed only on:

• South African–source income (e.g. rental from SA property).
• Certain deemed-source amounts (e.g. services rendered in SA).

They are not taxed on foreign-source income (salary from UK employment, interest from foreign bank, etc.), unless there is a specific anti-avoidance rule or a withholding tax that applies.

1.2 Gross Income and Taxable Income

The computation of an individual’s tax is built around these key concepts in the Income Tax Act:

1. Gross income
2. Exempt income
3. Deductions (general and specific)
4. Taxable income
5. Normal tax (using tax tables)
6. Tax rebates and credits
7. Tax payable (or refundable)

1.2.1 Definition of Gross Income

“Gross income” of any resident means:

The total amount, in cash or otherwise, received by or accrued to that resident during the year of assessment, excluding receipts or accruals of a capital nature, but including certain specified inclusions.

Key points to unpack:

• Amount: Must have a determinable money value. Cash or non-cash (fringe benefits, assets transferred, etc.).
• Received by: Received by the taxpayer or on their behalf (e.g. employer pays rent directly).
• Accrued to: When there is an unconditional right to an amount (the taxpayer can enforce it).
• During the year of assessment: 12-month period, usually 1 March to end of February for individuals.
• Capital vs revenue: Capital amounts are excluded from gross income unless specifically included elsewhere (e.g. some fringe benefits, recoupments, certain lump sums).

For non-residents, gross income includes only amounts from a South African source or deemed source.

1.2.2 Typical Gross Income Items for Individuals

Common exam-tested items in TAX3701:

• Remuneration:
  • Basic salary, wages, overtime, commissions, bonuses.
  • Leave pay, 13th cheque.
• Allowances and fringe benefits:
  • Travel allowance, subsistence allowance.
  • Employer-provided motor vehicle, low-interest loan.
  • Employer-paid medical aid and pension fund contributions (depending on rules).
• Investment income:
  • Local and foreign interest.
  • Local and foreign dividends (classified under gross income, but often exempt or partially exempt).
• Business or profession income (for sole proprietors).
• Rental income from property.
• Annuities (pension, retirement annuities – subject to special rules).
• Certain lump sums, for example from retirement funds or employment termination (often taxed via separate tables).

1.3 Exempt Income for Individuals

After determining gross income, identify exempt income. This is specifically excluded from “income” and therefore from taxable income.

Key exemptions commonly tested in TAX3701:

1.3.1 Local Dividends Exemption

• Most local dividends received by individuals from South African resident companies are exempt from normal tax, but subject to a dividends withholding tax (DWT) at 20%, usually withheld by the company or regulated intermediary.
• There are detailed rules and exceptions (e.g. dividends in specie, REIT distributions), but in typical undergraduate questions, you treat normal domestic share dividends as fully exempt in the hands of the individual.

1.3.2 Interest Exemption (Section 10(1)(i))

Individuals (natural persons) receive a limited exemption on interest income from South African sources:

• The exemption applies only to natural persons who are residents.
• There is a maximum annual exemption amount (the actual rand values are updated from time to time; exam questions usually specify or assume the legislation for a particular year of assessment).

Also important:

• Foreign interest is not exempt under this section; it is usually fully taxable, subject to foreign tax credits and other rules.
• Non-residents may enjoy an exemption on certain local interest if they are outside South Africa for at least 183 days and the interest is from specific qualifying instruments (commonly tested conceptually).

1.3.3 Other Common Exemptions

• Certain scholarships and bursaries (subject to employment-related conditions and thresholds).
• Certain lump sums from long-term insurance policies upon death or disability (depending on policy structure).
• Some social grants paid by the state.
• Certain foreign pensions and war pensions.

Always check the section 10 list of exemptions in your prescribed material (UNISA TAX3701 tutorials and the Income Tax Act summary) and apply them systematically in computations.

1.4 General Outline of Tax Computation for Individuals

For exam calculations, structure your answer in a clear, stepwise manner. A typical outline:

1. Determine residency (resident vs non-resident).
2. Compute gross income:
   • List each source (salary, bonus, allowances, rental, interest, etc.).
3. Less: Exempt income:
   • Interest exemption, exempt dividends, exempt bursaries, etc.
4. Equals: Income.
5. Less: Deductions (sections 11, 18A charitable donations, contributions allowed, etc.).
6. Plus / minus: Assessed losses from previous years (if applicable).
7. Equals: Taxable income.
8. Calculate normal tax: Apply individual tax tables for that year (progressive rates).
9. Less: Rebates:
   • Primary rebate (all individuals).
   • Secondary rebate (age 65–74).
   • Tertiary rebate (age 75+).
10. Equals: Tax payable before credits.
11. Less: Tax credits / prepayments:
    • PAYE, provisional tax payments, medical scheme fees credits, other s6A–s6B credits.
12. Equals: Tax payable/(refundable).

Exam strategy (UNISA TAX3701 and CUT Taxation modules):

• Lay out the steps in a logical, labeled format.
• Even if arithmetic errors occur, clear structure earns method marks.
• For partial information, state assumptions explicitly (e.g. “Assume current year of assessment interest exemption of R… applies”).

2. Employment Income, Fringe Benefits, and Allowances

Employment taxation is a major component of TAX3701 and related modules like CUT Taxation II and UNISA TAX201S. Questions often combine salary, fringe benefits, and allowable deductions.

2.1 Remuneration and PAYE Basics

Remuneration includes most amounts from employment:

• Salaries, wages, overtime.
• Bonuses and performance-related pay.
• Commission, allowances, and certain fringe benefits.

Employers must withhold PAYE (Pay As You Earn) on remuneration under the Fourth Schedule. However, for exam purposes in TAX3701, PAYE itself is usually just a credit against the final tax liability; the focus is on determining taxable remuneration.

2.2 Fringe Benefits (Seventh Schedule Overview)

Fringe benefits arise when an employee receives non-cash benefits from an employer. The Seventh Schedule sets out:

• Types of fringe benefits.
• Deemed taxable values.
• Circumstances where no value or reduced value applies.

Common fringe benefits tested in TAX3701:

1. Use of a company car.
2. Low-interest or interest-free loans.
3. Employer-owned accommodation (often tested at a higher level).
4. Employer contributions to medical schemes, pension, provident, and retirement annuity funds (under current rules, mostly treated as fringe benefits but then potentially deductible/credited).

2.2.1 Company Car Fringe Benefit

If an employer provides an employee with the right of use of a motor vehicle, a fringe benefit arises. The taxable value is generally calculated as a percentage of the vehicle’s determined value.

Key exam points:

• Determined value is usually the cash cost including VAT, or retail market value if no cost available.
• A monthly fringe benefit is included in remuneration:
  • A standard percentage of the determined value per month (e.g. 3.5% or 3.25% if with maintenance plan) – check the prescribed rate in the exam question or UNISA tutorial letter.
• Reductions:
  • If the employee bears cost of fuel or maintenance, certain percentage adjustments may apply.
  • If there is substantiated business travel, the fringe benefit may be partially reduced at the end of the year based on business vs private kilometres (tax return adjustment, not PAYE stage).
• If the employee uses the vehicle 100% for business, and can prove it (e.g. proper logbook), the fringe benefit may effectively be reduced to zero in the final assessment (again, exam questions must indicate this clearly).

Example (illustrative):

• Determined value: R300 000.
• Employer provides full fuel and maintenance.
• Monthly fringe benefit at 3.5%: R10 500 per month.
• Annual fringe benefit: R10 500 × 12 = R126 000.
• If business travel substantiated at 60% of total kilometres, then 60% of the fringe benefit might be reduced in final calculation, leaving 40% taxable (R50 400).

Exams may expect you to:

• Compute the annual fringe benefit.
• Adjust for business use if the question provides km details.

2.2.2 Low-Interest or Interest-Free Loans

When an employer grants an employee a loan at a rate below the official interest rate, a fringe benefit arises equal to:

(Official rate – actual interest rate charged) × loan balance.

Key points:

• The official interest rate is prescribed (often the repo rate plus a margin). The exam will either give the official rate or assume standard knowledge for that year.
• If the loan is for the purpose of buying primary residential property, there may be partial or full concessions (depends on legislative conditions during the relevant year).
• The fringe benefit is usually calculated monthly on the outstanding balance.

Example:

• Loan granted: R100 000 for holiday.
• Official rate: 8% p.a.
• Actual interest charged: 0% (interest-free).
• Annual fringe benefit: 8% × R100 000 = R8 000, included in gross income.

2.2.3 Employer Contributions to Retirement Funds and Medical Aid

Under modern rules (as reflected in recent TAX3701 syllabi):

• Employer contributions to:
  • Medical schemes,
  • Pension funds,
  • Provident funds,
  • Retirement annuity funds,
    are generally treated as taxable fringe benefits in the hands of the employee (i.e. added to gross income as part of remuneration).

Later, the employee may receive:

• A tax deduction for retirement fund contributions (section 11F).
• Medical scheme fees tax credits and additional medical expenses tax credits (sections 6A and 6B) rather than deductions.

Exam questions often require you to:

• Correctly include employer contributions in gross income.
• Then apply the correct deduction/credit rules.

2.3 Allowances: Travel and Subsistence

Allowances are cash amounts paid to employees to cover specific costs. Common ones:

1. Travel allowance (sec 8(1)(b)).
2. Subsistence allowance (sec 8(1)(c)).
3. Other allowances (e.g. uniform, special duty allowances).

2.3.1 Travel Allowance

A travel allowance is paid to cover the cost of using an employee’s own vehicle for business purposes.

Tax implications:

• 80% of the travel allowance is generally included in remuneration for PAYE.
• If the employer is satisfied that at least 80% of travel is for business, only 20% of the allowance is included in remuneration monthly.
• At the end of the year, the employee must determine the taxable portion of the allowance using:
  • Actual records of business vs private kilometres, and
  • Either actual costs or prescribed SARS tables (per km) for deductions.

Exam steps:

1. Include the full travel allowance in gross income.
2. Deduct the allowable business travel expenses (either actual costs apportioned or deemed expenses using tables).
3. The net amount (allowance minus deduction) is effectively taxable.

Example (illustrative):

• Annual travel allowance: R60 000.
• Total km: 30 000; business km: 18 000 (60%).
• Taxpayer uses deemed cost per km of (say) R3.50/km.
• Deductible amount: 18 000 × R3.50 = R63 000 (cannot exceed allowance; but specific rules apply).
• If the deduction exceeds the allowance, the net effect may be that no part of the allowance is taxable (subject to the legislative caps in force). Exam questions will specify the relevant SARS tables.

Always read the question: some exams at UNISA and CUT will give simplified per‑km rates and instructions.

2.3.2 Subsistence Allowance

A subsistence allowance is paid when an employee is required to sleep away from their usual place of residence for business purposes.

Key points:

• The allowance is included in gross income only to the extent that it exceeds the deemed exempt amounts.
• SARS publishes daily deemed amounts for meals and incidental costs, and for incidental costs only.
• If the allowance does not exceed the deemed amount for the actual days away, it is considered fully exempt.
• The employee does not need to produce all receipts if using the deemed amounts, but must have proof of being away (e.g. travel bookings).

Exam approach:

1. Calculate total allowance received.
2. Calculate deemed exempt amount: number of qualifying days × SARS daily rate.
3. Taxable portion = allowance – deemed exempt amount (if positive).

Example:

• Allowance: R600 per day.
• Employee away for 5 days for business.
• SARS deemed rate for meals/incidental: R452 per day (illustrative).
• Deemed exempt: 5 × R452 = R2 260.
• Total allowance: 5 × R600 = R3 000.
• Taxable portion: R3 000 – R2 260 = R740.

2.4 Other Common Employment Income Issues

2.4.1 Bonuses and Leave Pay

• Annual bonuses, performance bonuses, and leave encashments are fully taxable as part of gross income.
• No special exemptions for normal leave encashment (subject to limited exceptions in termination packages).

2.4.2 Restraint of Trade Payments

• Amounts paid to an individual in terms of a restraint of trade agreement (for agreeing not to compete with the employer) are fully taxable as gross income.
• Historically, there were special rules, but for exam purposes in TAX3701, treat them as ordinary gross income unless otherwise directed in the question.

2.4.3 Lump Sum Payments on Termination of Employment

TAX3701 sometimes touches on:

• Retirement fund lump sums (on retirement, death, or withdrawal).
• Severance benefits.

These are typically taxed according to special tax tables:

• Retirement/death/severance lump sum table (with R500 000 or similar tax-free portion, depending on law applicable in exam year).
• Withdrawal lump sum table (with lower tax-free thresholds).

Exam questions may:

• Ask for the taxable portion of such a lump sum.
• Require adjustment of contribution histories to determine tax-free parts.

Always:

• Distinguish between pre-retirement withdrawal and retirement/severance/death.
• Use the correct table and accumulate previous lump sums received during the taxpayer’s life, because thresholds apply on a cumulative lifetime basis.

3. Investment Income, Rental, and Other Non-Employment Sources

Beyond employment, TAX3701 devotes substantial attention to income from investments, property, and small business activities (sole proprietors).

3.1 Interest Income

Interest is a key exam area, especially due to the partial exemption.

3.1.1 Local Interest

Local interest may be earned from:

• Bank fixed deposits and call accounts.
• Retail savings bonds.
• Loan accounts (interest paid by a local company or individual).

Tax treatment for residents:

• Fully included in gross income.
• Then reduced by an annual exemption (section 10(1)(i)).
• Any interest above the exemption is taxable.

Tax treatment for non-residents:

• Certain local interest may be exempt from normal tax if:
  • The individual is physically absent from South Africa for at least 183 days in that year, and
  • The interest is not from a permanent establishment in South Africa.
• However, withholding tax on interest (at 15%) may apply to non-residents unless exempted under a DTA.

Exam tip:

• Always check whether the person is a resident or non-resident.
• Apply the correct exemption and clearly show the calculation in a step-by-step manner.

3.1.2 Foreign Interest

Foreign interest received by a South African resident is:

• Fully included in gross income (no s10(1)(i) exemption).
• May be subject to foreign tax in the source country; then foreign tax credits could be claimed according to section 6quat (usually tested more in advanced modules but conceptually important).

For non-residents, foreign interest is generally outside the South African tax net.

3.2 Dividends

3.2.1 Local Dividends

As noted earlier:

• Most local dividends are fully exempt from normal tax for individuals.
• A 20% DWT is generally withheld by the company/distributor.

In exam computations:

• Include dividends in gross income.
• Immediately deduct them as exempt income.
• No further normal-tax impact (but remember them if question asks for gross income total).

3.2.2 Foreign Dividends

Foreign dividends are more complex:

• Partially taxable depending on shareholding and listed status.
• Certain participation exemptions (e.g. if the taxpayer holds a significant interest in the foreign company) may apply.
• In many undergraduate questions, foreign dividends are simply stated as taxable or partially exempt; apply the given rules in the question.

Always read exam facts: TAX3701 examiners may simplify foreign dividend rules for the purpose of one or two marks.

3.3 Rental Income from Property

For individuals, rental income from letting residential or commercial property is a classic exam topic in TAX3701, particularly when combined with deductible expenses and capital allowances.

3.3.1 Determining Rental Income

Gross rental income may include:

• Monthly rent received.
• Recoveries from tenants for utilities (electricity, water).
• Lease premiums and key money (special rules may apply).
• Parking fees.

From this, deduct allowable expenses to arrive at net rental income.

3.3.2 Deductible Rental Expenses

General rule (section 11(a) – general deduction formula):

Expenditure and losses actually incurred in the production of income, not of a capital nature, and laid out for the purposes of trade.

Common deductible rental expenses:

• Municipal rates and taxes.
• Electricity, water, and utilities if paid by the landlord.
• Repairs and maintenance (not improvements).
• Advertising costs to find tenants.
• Estate agent / letting agent commission.
• Insurance on the property.
• Interest on a loan to acquire the rental property.
• Body corporate levies for sectional title units (if related to income-earning part).

Non-deductible or limited deduction items:

• Capital improvements (rebuilds, extensions) – usually capitalised; may affect capital gains tax or allowances.
• Private portion: If part of the property is used by the owner for private purposes, allocate expenses proportionately between rental and private.

Example:

• Total municipal rates: R12 000 for the year.
• 75% of the house is rented; 25% is used by the owner.
• Deductible municipal rates: R12 000 × 75% = R9 000.

3.3.3 Rental Losses and Assessed Losses

If rental expenses exceed rental income, the result is a rental loss. For individuals:

• Rental activities generally qualify as a trade.
• Rental losses can therefore be set off against other income, unless restricted by specific anti-avoidance (section 20A on suspect trades and ring-fencing of assessed losses for high-income individuals with “hobby-type” losses).

In most undergraduate questions, straightforward rental losses are allowed as part of assessed loss for that year, unless the question specifically addresses ring-fencing.

3.4 Business Income of Sole Proprietors

Many TAX3701 questions include a natural person who runs a small business as a sole proprietor (e.g. a consulting practice, small retail shop, or hair salon).

3.4.1 Business Gross Income

Includes:

• Sales of goods or services.
• Commissions and fees.
• Recoveries (for expenses previously deducted) – might be recoupments (section 8(4)) in some cases.

3.4.2 Business Deductions

Sole proprietors can deduct all trade-related expenses that meet:

• The general deduction formula (s11(a)), and
• Do not fall under the prohibitions in section 23 (e.g. not private or domestic, not of a capital nature, not fines or penalties).

Common deductible expenses:

• Cost of sales (for retailers).
• Salaries and wages paid to staff.
• Rental of business premises.
• Telephone and internet (only business portion).
• Consumables and stationery.
• Repairs to business equipment.
• Motor vehicle expenses (if vehicle used in trade).
• Bad debts and provisions (subject to rules).
• Depreciation via wear-and-tear allowances (section 11(e)).

Sole proprietor profits are taxed in the hands of the individual at personal tax rates, not corporate rates.

3.4.3 Assessed Losses from Trade

If trade expenses exceed trade income, there is a trade loss. This can become an assessed loss:

• It can be set off against other income in the same year, unless ring-fenced under section 20A.
• Any balance is carried forward to the next year as an assessed loss.
• An assessed loss can generally be carried forward indefinitely, as long as the taxpayer continues to carry on a trade.

Ring-fencing of losses (section 20A) may apply where:

• The taxpayer has high taxable income from other sources, and
• The loss arises from a suspect trade with elements of a hobby or lifestyle (e.g. horse breeding, certain arts, or sports).

For TAX3701, ring-fencing may be introduced conceptually, but often detailed calculations appear in more advanced modules like UNISA TAX3703 or CUT’s Taxation III.

4. Deductions, Retirement Contributions, and Medical Tax Credits

A key skill in TAX3701 is moving from gross income to taxable income, by correctly applying deductions and tax credits.

4.1 General Deduction Formula (Section 11(a))

The general deduction formula allows deduction of:

1. Expenditure and losses,
2. Actually incurred,
3. In the production of income,
4. Not of a capital nature,
5. For the purposes of the trade of the taxpayer.

Negative tests in section 23:

• Section 23(a): No deduction for domestic or private expenses.
• Section 23(b): No deduction for costs of domestic premises used for residential purposes, subject to specific exceptions (like home office rules).
• Section 23(g): Expenditure must be wholly or mainly for trade; otherwise limited apportionment.
• Other exclusions: Fines, penalties, certain taxes (e.g. income tax itself) are not deductible.

Exam application:

• For each claimed deduction, check:
  • Is there a nexus between the expense and income production?
  • Is it revenue (recurrent) rather than capital (once-off asset acquisition)?
  • Is it not private?

Examples of expenses often tested:

• Professional subscriptions: usually deductible if directly related to income-earning activity.
• Clothing: generally not deductible unless it is a special uniform specifically required (e.g. branded protective clothing, not just “office clothes”).
• Home office expenses: deductible only if strict conditions of exclusive use and regularly occupied for trade are met and the taxpayer is subject to more than 50% of their duties being performed from home (or similar requirement – check latest guidelines).

4.2 Specific Deductions for Individuals

In addition to section 11(a), the Act contains various specific deduction provisions, many of which appear in TAX3701 questions.

4.2.1 Retirement Fund Contributions (Section 11F)

From a certain reform date, contributions to:

• Pension funds,
• Provident funds, and
• Retirement annuity (RA) funds

are treated under a unified deduction system (section 11F).

Key rules (conceptual level):

• A taxpayer may claim a deduction for contributions (own and employer contributions included as fringe benefits), subject to an annual limit expressed as a percentage of remuneration or taxable income (whichever is greater) up to a monetary cap.
• Contributions in excess of the allowed limit are carried forward to future years. They may be used to:
  • Increase future deduction, or
  • Increase the tax-free portion of future retirement lump sums or annuities.

Exam scenarios:

• A taxpayer contributes R60 000 to a RA fund.
• Employer also contributes R40 000 to a pension fund on behalf of the employee (taxable fringe benefit).
• The deduction limit might be (say) 27.5% of the higher of taxable income or remuneration, subject to (for example) R350 000 per annum. (The exact numbers may vary by exam year; always check your prescribed material.)
• You must calculate the maximum allowable deduction and determine if there’s any excess contribution carried forward.

4.2.2 Donations to Approved Public Benefit Organisations (Section 18A)

Donations to approved public benefit organisations (PBOs) can be tax-deductible:

• The organisation must be approved by SARS under section 18A.
• The donor (taxpayer) must obtain a valid section 18A receipt.
• Deduction limit: The total deduction in any year is limited to a percentage of taxable income (before this deduction) – often 10% in current law.
• Excess donations over the limit are carried forward to the next year.

Exam approach:

1. Confirm that the organisation is an approved PBO.
2. Confirm that a section 18A certificate is issued.
3. Calculate maximum deductible amount (10% of taxable income before this deduction).
4. Classify any excess as carried forward.

4.3 Medical Tax Credits (Sections 6A and 6B)

The previous system of deductions for medical expenses has been replaced for most individuals with tax credits (a “rebate-like” system).

There are two main components:

1. Medical scheme fees tax credit (MTC) – section 6A.
2. Additional medical expenses tax credit (AMTC) – section 6B.

These are particularly important in TAX3701 and in parallel modules like CUT’s Taxation of Individuals.

4.3.1 Medical Scheme Fees Tax Credit (MTC)

This is a fixed monthly amount per person covered by a registered medical scheme:

• For the main member and first dependant: a fixed base amount each (same rate).
• For each additional dependant: a smaller (but still fixed) monthly amount.

The actual rand amounts (e.g. R364 for main member, R364 for first dependant, R246 for each additional dependant, etc.) change over time. Your prescribed textbook or exam question will provide current figures.

Key points:

• Applies per month of membership.
• Directly reduces tax payable, not taxable income.
• Available to:
  • The member who pays the medical scheme contributions, and
  • In some cases, a person who pays premiums on behalf of dependants.

Example:

• Taxpayer A is a main member with 2 dependants (spouse and child) for 12 months.
• If monthly credits are (illustrative):
  • R364 (main member),
  • R364 (first dependant),
  • R246 (each additional dependant),
    then:
  • Monthly MTC: R364 + R364 + R246 = R974.
  • Annual MTC: R974 × 12 = R11 688.
• This R11 688 is deducted from normal tax at the end of the computation.

4.3.2 Additional Medical Expenses Tax Credit (AMTC)

The AMTC is designed to give relief for:

• Out-of-pocket medical expenses (not covered by medical aid), and
• Excess contributions to schemes not already relieved by MTC.

The calculation differs depending on whether the taxpayer:

• Is 65 years or older, or
• Is under 65 but has a disability or has a dependant with a disability, or
• Is under 65 with no disability in the family.

Basic conceptual structure:

• For older/disability taxpayers: a larger proportion of qualifying expenses qualifies as a credit.
• For younger taxpayers without disability: more restrictive thresholds (e.g. only expenses above a certain percentage of taxable income).

The AMTC is calculated as 25% (or another prescribed percentage in law) of the amount by which medical expenses exceed the relevant threshold.

Exam tip:

• Carefully identify type of taxpayer (age, disability).
• Segregate medical scheme contributions (already partially taken into account via MTC) and other qualifying medical expenses.
• Follow the specific formula given in study material for that exam year.

4.4 Home Office and Employment-Related Deductions

TAX3701 sometimes examines deductions for employees, especially working from home or using their own equipment.

4.4.1 Home Office Expenses

Employees can claim home office expenses if:

• They earn remuneration that includes a variable component, or they are independent contractors.
• They use a specific part of the home exclusively and regularly for trade purposes (e.g. a study).
• More than 50% of their duties are performed from this home office (for employees) or the home office is used mainly for business if they are self-employed.

Deductible home office expenses (apportioned by floor area or similar reasonable method):

• Rental or interest on bond (pro rata).
• Rates and taxes.
• Electricity, cleaning, and maintenance.
• Wear and tear on office furniture and equipment.

Private expenses (bedrooms, lounge) remain non-deductible.

Exam approach:

1. Determine if the taxpayer meets the legal requirements.
2. Calculate the ratio of office area to total floor area.
3. Apportion relevant expenses accordingly.
4. Deduct in computing taxable income.

4.4.2 Other Employment Expenses

Employees may claim certain expenses if not reimbursed by the employer and if incurred in the production of income, e.g.:

• Travel expenses when not covered by travel allowance but reimbursed at less than SARS rate (complex).
• Professional expenses or tools (e.g. specialised equipment for a technician).
• Protective clothing (not ordinary wear).

The general deduction formula and section 23 limitations apply strictly; exam questions often include “trap” items like:

• Normal office clothing – not deductible.
• Commuting costs between home and work – not deductible (considered private).

Consistent application of the statutory tests is essential.

5. Capital Gains Tax, Tax Tables, and Comprehensive Exam Strategies

TAX3701 includes an introduction to Capital Gains Tax (CGT) as it applies to individuals, along with the application of individual tax tables and overall exam problem-solving techniques.

5.1 Capital Gains Tax (CGT) for Individuals

CGT is not a separate tax but part of income tax. For individuals, it arises when they dispose of capital assets.

5.1.1 Basic CGT Steps

1. Identify a disposal of an asset:
   • Disposal includes sale, donation, exchange, death (deemed disposal), etc.
2. Determine proceeds:
   • Amount received or accrued (or deemed, e.g. market value on donation).
3. Determine base cost:
   • Cost of acquisition plus directly related expenditure (e.g. transfer duty, legal costs, improvement costs).
4. Calculate capital gain or loss:
   • Capital gain = Proceeds – Base cost (if positive).
   • Capital loss = Base cost – Proceeds (if positive).
5. Aggregate all capital gains/losses in the year to find aggregate capital gain or assessed capital loss.
6. Apply the annual exclusion for individuals.
7. Obtain the net capital gain.
8. Multiply by inclusion rate to get the taxable capital gain.
9. Add taxable capital gain to taxable income.

Key exam parameters (conceptual):

• Individuals enjoy an annual exclusion (e.g. R40 000 per year, but always check the current figure).
• In the year of death, a higher exclusion (e.g. R300 000) may apply.
• The inclusion rate for individuals is lower than for companies (e.g. 40% in current law).
• Certain disposals may have special exclusions, such as:
  • Primary residence exclusion (first R2 million of capital gain on sale of primary residence).
  • Small business assets on retirement (subject to conditions and lifetime limit).
  • Personal-use assets (e.g. personal motor car, household furniture) – often exempt from CGT.

5.1.2 CGT Example (Illustrative)

Suppose an individual, a resident, sells an investment property:

• Proceeds from sale: R1 200 000.
• Original cost: R700 000.
• Improvement costs (capital): R100 000.
• Transfer and legal costs: R30 000.

Base cost = R700 000 + R100 000 + R30 000 = R830 000.

Capital gain = R1 200 000 – R830 000 = R370 000.

Assume no other disposals in the year, and annual exclusion is R40 000.

Aggregate capital gain: R370 000.
Less annual exclusion: R40 000.
Net capital gain: R330 000.

If the inclusion rate for individuals is 40%, then:
Taxable capital gain = R330 000 × 40% = R132 000.

This R132 000 is added to the person’s taxable income and taxed at their marginal rate.

Exam authors sometimes combine CGT with other income sources to test integration.

5.1.3 Common CGT Exam Traps

• Distinguishing capital vs revenue:
  • If a taxpayer frequently buys and sells properties as a business, property may form trading stock (revenue), not capital.
  • For long-term, non-speculative holdings by individuals, disposal usually yields a capital gain.
• Ignoring improvements:
  • Many students forget to add legitimate improvement costs to base cost.
• Forgetting annual exclusion:
  • Must always apply for individuals, except for some cases where losses are ring-fenced.
• Primary residence:
  • Only applies to natural persons, not companies.
  • Must be primarily used for domestic purposes, not for rental.
  • Exclusion is not a separate deduction but reduces capital gain subject to CGT.

5.2 Individual Tax Tables and Marginal Rates

TAX3701 typically requires you to apply personal income tax tables for the relevant year of assessment, which the exam paper or tutorial questions provide.

Characteristics of SA individual tax system:

• Progressive rates: as taxable income increases, marginal rate increases.
• Multiple brackets, each with a:
  • Base tax for the bracket, plus
  • A percentage of income above the threshold.

Example of structure (illustrative, not current law):

Taxable Income (R)	Tax Calculation
0 – 216 200	18% of each R1
216 201 – 337 800	R38 916 + 26% of amount above R216 200
337 801 – 467 500	R70 532 + 31% of amount above R337 800
467 501 – 613 600	R110 739 + 36% of amount above R467 500
613 601 – 782 200	R163 335 + 39% of amount above R613 600
782 201 – 1 656 600	R229 089 + 41% of amount above R782 200
1 656 601 and above	R587 593 + 45% of amount above R1 656 600

Exam application:

1. Determine taxable income after all deductions and taxable capital gains.
2. Locate the correct bracket.
3. Plug into formula to compute gross normal tax.
4. Subtract rebates.

5.3 Rebates and Age-Related Relief

Rebates reduce normal tax and are not dependent on expenses.

Three main rebates for individuals (conceptual, amounts vary by year):

1. Primary rebate – available to all resident individuals.
2. Secondary rebate – additional rebate for those aged 65 and above.
3. Tertiary rebate – further additional rebate for those aged 75 and above.

Age is determined at the end of the year of assessment (end of February). Proof of date of birth is assumed in exam scenarios.

Calculation:

• Compute normal tax from tables.
• Deduct primary rebate.
• If aged 65–74, also deduct secondary rebate.
• If 75 or older, also deduct tertiary rebate.

Non-residents get the primary rebate but may have differences in treatment for interest exemptions and medical credits, depending on legislation.

5.4 Putting It All Together: Comprehensive Exam Strategy (UNISA TAX3701 and Similar Courses)

TAX3701 at UNISA and similar modules at CUT (e.g. TAX3701 equivalent in BTech: Taxation or SAQA-aligned Taxation of Individuals modules) typically present integrated questions worth 20–40 marks, combining:

• Employment income and fringe benefits.
• Investment income (interest, dividends).
• Rental property and small business trade.
• Retirement fund contributions and medical credits.
• CGT on disposal of assets.
• Application of tax tables and rebates.

A robust exam approach:

5.4.1 Structured Answer Layout

Always use a clear, labeled structure:

1. Gross income:
   • Salary
   • Bonuses
   • Fringe benefits (company car, loan, employer contributions)
   • Rental income (before expenses)
   • Business income
   • Interest, dividends
   • Other items
2. Less: Exempt income:
   • Interest exemption
   • Dividends exemption
   • Any other s10 exemptions
3. Equals: Income.
4. Less: Deductions:
   • Retirement contributions (s11F)
   • Donations (s18A)
   • Trade expenses (business, rental)
   • Home office (if applicable)
5. Add: Taxable capital gain (from CGT working).
6. Equals: Taxable income.
7. Calculate normal tax using tax tables.
8. Less: Rebates (primary, secondary, tertiary).
9. Equals: Tax after rebates.
10. Less: Tax credits:
    • Medical scheme fees credit (s6A).
    • Additional medical expenses credit (s6B).
    • Foreign tax credits (if provided in question).
11. Equals: Final tax liability.
12. Less: PAYE and provisional tax already paid.
13. Equals: Tax payable/(refundable).

Exam markers award significant method marks for this structure, especially at UNISA, CUT, and universities like UJ and TUT with similar curriculum.

5.4.2 Time Management and Question Selection

In UNISA TAX3701 exams:

• Allocate time proportionally to marks (e.g. 1.5 minutes per mark).
• Start with the big integrated calculation question if you are comfortable, or tackle shorter theory questions first to build confidence.
• Don’t get stuck on one tricky adjustment (e.g. a complex fringe benefit); approximate and move on, then return if time permits.

5.4.3 Common Student Errors

1. Ignoring residency status:
   • Failing to conclude whether the person is a resident or non-resident, leading to incorrect inclusion of foreign income.
2. Mishandling exemptions:
   • Double counting interest exemption.
   • Forgetting to exempt local dividends.
3. Incorrect treatment of employer contributions:
   • Not including them as fringe benefits.
   • Forgetting to deduct them under the allowed retirement contribution deduction.
4. Confusing deductions and credits:
   • Treating medical scheme fees as a deduction rather than a tax credit.
   • Not applying the correct formula for AMTC.
5. Not applying CGT annual exclusion:
   • Leading to inflated taxable capital gains.
6. Not using tax tables correctly:
   • Using the wrong bracket or miscalculating tax for the band.

5.4.4 Study Approach for UNISA TAX3701 and Related Modules

To maximise performance in modules like UNISA TAX3701, UNISA TAX2601, and CUT’s Taxation of Individuals:

• Work through:

  • All myUnisa tutorial letters and past papers.
  • Prescribed textbook examples and self-test questions.
  • Past exam questions for similar modules from other South African universities (e.g. NWU, UJ) where accessible.

• Practice comprehensive questions:

  • Simulate timed conditions (e.g. 30–40 minutes per integrated question).
  • Mark your own work strictly using suggested solutions.

• Build a summary sheet of:

  • Key rates (interest exemption, MTC amounts, tax brackets).
  • CGT inclusion rate and annual exclusion.
  • Retirement contribution and donation deduction limits.

• Focus on logical reasoning:

  • Don’t just memorise; understand why an amount is included or excluded.
  • Be able to explain, in a short sentence, the statutory basis (e.g. “Exempt in terms of s10(1)(k)”).

• Stay updated with:

  • Latest legislative amendments applicable to the exam year.
  • Any deviations explicitly noted in your UNISA or CUT tutorial letters.

These comprehensive TAX3701: Taxation of Individuals notes synthesise the core concepts, detailed calculations, and exam techniques expected in UNISA BCom Taxation and similar South African undergraduate modules focused on individual taxpayers. Proper mastery of residency rules, income and exemption classification, deductions, credits, CGT, and stepwise tax computation provides a solid foundation not only for passing TAX3701 but also for progression to more advanced taxation modules and professional qualifications in South Africa.