TAX301: Taxation III Exam Notes (Rhodes University BCom Accounting)

Comprehensive study notes for Rhodes University (RU) BCom Accounting – TAX301: Taxation III. These notes are aligned with typical South African university tax curricula and are useful for students cross‑referencing with similar courses such as UNISA TAX3701 / TAX3702 and CUT ACT36AT / TAX36AT, but the emphasis and structure follow the Rhodes University Taxation III focus on advanced South African income tax, CGT, and corporate tax. The document is designed for final exam revision, integrating legislation, SARS practice, and exam‑style examples.

1. South African Tax Framework and Residency (TAX301 Foundations)

1.1 Structure of the South African Tax System

South Africa operates on a residence‑based income tax system, administered mainly under the Income Tax Act 58 of 1962 (“ITA”). For TAX301 at Rhodes University, students are generally expected to know:

Who is taxed (natural persons, companies, trusts, non‑residents).
On what income (gross income, capital gains, fringe benefits).
At what rates (individual brackets, corporate rate, dividends tax, CGT inclusion).
By what authority (Income Tax Act, Tax Administration Act 28 of 2011, SARS).

Key components:

Direct taxes
- Income tax (individuals, companies, trusts).
- Capital gains tax (CGT) – part of income tax, not a separate tax.
- Dividends tax.
- Donations tax, estate duty (TAX301 may examine integration with CGT).
Indirect taxes (covered in less depth in Taxation III but context is useful):
- Value‑Added Tax (VAT) – governed by VAT Act 89 of 1991.
- Transfer duty, fuel levies, sin taxes (excise duties).
Tax administration
- Tax Administration Act (TAA) governs:
  - Assessments (original, additional, reduced).
  - Objections and appeals.
  - Penalties and interest.
  - Record‑keeping, audits and SARS information powers.

Exam focus in TAX301:

Emphasis on income tax, CGT, and corporate tax.
Ability to identify the correct section and apply it logically (e.g. s1 definition of gross income, s11 deductions, Eighth Schedule CGT).
Distinguish between legal principles and numeric calculations; both are tested.

1.2 Residence vs Source – Tax Liability

South Africa taxes:

Residents: On worldwide income (subject to exemptions and foreign tax credits).
Non‑residents: Only on South African‑source income and certain SA‑connected CGT items (immovable property, permanent establishments, etc.).

1.2.1 Definition of “Resident” – Natural Persons

The ITA s1 defines “resident” for natural persons in two ways:

Ordinarily resident test (primary test).
Physical presence test (secondary, only if not ordinarily resident).

Ordinarily resident test (common‑law concept):

A person is ordinarily resident where they have their real home, the country to which they intend to return, considering:
- Permanent home and family base.
- Employment and business interests.
- Location of personal belongings.
- Intention to emigrate or remain abroad.
Case law: Cohen v CIR and CIR v Kuttel illustrate that intention plus factual ties determine ordinary residence.

Physical presence test (s1, “resident” definition):

A person is deemed resident if:

Present in SA for > 91 days in the current year of assessment; and
Present in SA for > 91 days in each of the 5 preceding years; and
Present in SA for > 915 days in total during those 5 preceding years.

If all three are met, residency applies from the first day in the current year.
If the person leaves SA and is not physically present for a continuous 330‑day period, they cease to be a resident under the physical presence test from the day of departure.

Double tax agreements (DTAs) may override domestic rules – tie‑breaker tests:

Permanent home.
Centre of vital interests.
Habitual abode.
Nationality.
Mutual agreement procedure.

TAX301 exams often require:

Applying the ordinary residence and physical presence tests.
Considering DTAs for dual‑residence scenarios.
Clearly stating from which date a person becomes/ceases to be resident.

1.2.2 Companies and Close Corporations – Resident Status

A company (including close corporations, certain foreign entities) is resident if:

Incorporated, established, or formed in South Africa; or
Has its place of effective management (POEM) in South Africa.

Exceptions:

A company is excluded from being a resident if it is treated as resident of another country under an applicable DTA (and not of SA).

“Place of effective management”:

Where key management and commercial decisions necessary for the conduct of the business are made.
Not necessarily the legal registered office; often where the board meets or strategic decisions are implemented.

Exam application:

Identify if a foreign‑incorporated company’s POEM is in SA (e.g. directors based in SA and key decisions taken in SA).
Consider whether a DTA changes the residency.

1.3 Source of Income

For non‑residents and for certain withholding taxes, understanding the source of income is critical:

Employment income: Where services are rendered.
Business profits: Where operations are carried out; permanent establishment considerations under DTAs.
Interest: Usually where the debtor is located/headquartered or where the credit is used.
Royalties: Where the intellectual property is used.
Dividends: Usually sourced where the company is resident.
Immovable property: Source where the property is located (notably relevant for CGT of non‑residents).

TAX301 exams often involve stepwise reasoning:

Is the taxpayer a resident? If yes, worldwide income (subject to exemptions).
If non‑resident, determine source and whether specific withholding taxes apply (e.g. dividends tax, royalty withholding tax).
Apply any relevant DTA relief.

1.4 Resident vs Non‑Resident – Practical Exam Example

Example scenario (typical of Rhodes University TAX301 level):

Lerato, a South African citizen, worked in Grahamstown (Makhanda) until 31 May 2023.
On 1 June 2023, she emigrated to Australia with her family, sold her SA house, and took up indefinite employment there.
She spent 60 days in SA during 2024 to finalise personal matters.
Assume no DTA complications for simplicity.

Analysis:

Ordinarily resident:
- Until 31 May 2023, Lerato’s permanent home and emotional ties are SA.
- After selling her home and relocating with family permanently, her centre of vital interests moves to Australia.
- She ceases to be ordinarily resident on 1 June 2023.
Physical presence test:
- Check last 5 years – likely met if she lived in SA continuously, but after she leaves:
- For the 2024 year, she does not satisfy the “> 91 days” requirement in that year.
- Additionally, after a continuous 330‑day absence, physical presence status lapses if it applied previously.

Result:

2023 year (1 March 2022 – 28 Feb 2023): Resident full year.
2024 year (1 March 2023 – 29 Feb 2024): Part‑year; resident from 1 March 2023 to 31 May 2023 (if exam expects to deal with exit CGT, this period is vital). Thereafter, non‑resident.

Exam markers want:

Clear statement of status in each year.
Correct legislative references (s1 residency, ordinarily resident principles).
Recognition of exit CGT implications when ceasing to be resident (deemed disposal of worldwide assets excluding SA immovable property and certain items).

2. Gross Income, Exemptions and Fringe Benefits (Individual Tax – Advanced)

2.1 Gross Income Definition and Inclusions

For TAX301, the starting point of any income tax question is the s1 definition of gross income:

“Gross income”, in relation to any year of assessment, means the total amount, in cash or otherwise, received by or accrued to or in favour of a taxpayer, during such year of assessment, excluding receipts or accruals of a capital nature, but including certain specified amounts (e.g. tax‑free amounts that are “deemed” to be income).

Key elements:

Amount
- Money or money’s worth.
- Valued at the market value if non‑cash.
Received by or accrued to
- Received by: Amounts over which the taxpayer has an unconditional entitlement and control.
- Accrued to: Amounts to which the taxpayer is unconditionally entitled, even if payment is not yet made (right to claim).
Not of a capital nature
- Need to distinguish between income vs capital:
  - Income: Regular, periodic, short‑term holding, trading intention.
  - Capital: Once‑off, long‑term investment, asset‑structure, not stock‑in‑trade.
Specific inclusions (overriding “capital” exclusion):
- Recoupments (s8(4)(a)).
- Certain lump sum benefits from retirement funds.
- Fringe benefits (s8A, s8B, s8C, Seventh Schedule).
- Taxable capital gain (s26A read with Eighth Schedule).

Exam technique:

Identify each receipt or accrual independently.
Decide if it is capital or revenue.
If capital, check if legislation forces inclusion (e.g. recoupment, CGT).
Only then proceed to allowable deductions.

2.2 Exempt Income – Key Sections for TAX301

Important exemption sections:

s10(1)(o)(ii) – Foreign employment income exemption (subject to days test and cap).
s10(1)(gC) – Certain compensation and damages for personal injury or death.
s10(1)(nB) – Certain scholarships and bursaries (with conditions).
s10(1)(i) – Specific local interest exemptions for non‑residents (limited).
Certain dividends – exempt from normal tax but subject to dividends tax (20%).

Foreign employment income – s10(1)(o)(ii):

Applies to South African residents rendering employment services outside SA.
Requirements:
- Services rendered outside SA for:
  - More than 183 full days in aggregate during any 12‑month period, and
  - At least 60 continuous days within that 183‑day period.
- Only the first R1.25 million (illustrative cap; always check latest threshold for your exam year) of qualifying remuneration may be exempt; amounts above remain taxable in SA.
Usually a focus point in advanced level individual tax questions.

Exam tips:

Calculate foreign days precisely; ignore travel days if not full days abroad.
Distinguish between days in SA and days outside SA.
Cap the exemption and treat any excess as taxable remuneration.

2.3 Fringe Benefits and the Seventh Schedule

The Seventh Schedule to the ITA, read with s2 and s8(1), regulates fringe benefits. Common benefits tested in TAX301:

Use of employer‑provided motor vehicle.
Employer‑provided accommodation.
Low‑interest or interest‑free loans.
Medical aid contributions (shifted mostly to tax credits, but underlying benefit principles remain relevant).
Right of use of assets other than accommodation and motor vehicles.
Acquisition of assets at less than market value.

2.3.1 Employer‑Provided Motor Vehicle

Valuation (typical formula):

Calculate taxable value per month by a percentage of the determined value (usually cost including VAT but excluding finance charges):
- Common exam assumption: 3.5% per month of determined value.
- If employer does not provide fuel or maintenance, rate may differ (e.g. 3.25% or other rates per current SARS tables – exam questions will specify or point to a SARS table in annexures).

Reductions:

Business travel component: If accurate logbook is kept, the fringe benefit is reduced proportionately for business use:
- Taxable benefit = Total benefit × (Private km / Total km).
Contributions by employee:
- If employee pays for certain costs, these may reduce the taxable benefit.

Exam structure when dealing with company car:

Determine annual determined value and monthly fringe benefit.
Calculate total annual fringe benefit (monthly × number of months the car is available).
Apply business‑use reduction (if logbook provided).
Deduct employee’s contributions (e.g. if employee reimburses employer for private fuel).
Include net amount in gross income as a fringe benefit.

2.3.2 Accommodation Fringe Benefit

Employer‑provided accommodation is taxable as per para 9 of the Seventh Schedule:

Typically, a value determined as a percentage of remuneration or market rental value depending on circumstances, reduced by:
- Amount contributed by the employee.
- Certain special conditions (e.g. remote area accommodation).

Key factors:

Whether the employer owns or rents the property.
Whether the employee is required to be on premises.
Whether accommodation is temporary vs long‑term.

Exam approach:

Follow para 9 formula as given in exam annexure.
Pay attention to period (number of months during which benefit was enjoyed).
Adjust for employee payments.

2.3.3 Low‑Interest Loans

Para 2(f) of the Seventh Schedule:

If an employer grants an employee an interest‑free or low‑interest loan, the fringe benefit equals:
- Official rate of interest (as per SARS) minus actual interest charged,
- Applied to outstanding loan balance.

Example:

Loan balance: R200 000 for full tax year.
Official rate: 8% p.a.
Interest charged to employee: 0%.
Fringe benefit: R200 000 × 8% = R16 000.

This amount is gross income in the employee’s hands.

2.4 Case Study: Comprehensive Gross Income and Fringe Benefits

Scenario:

Thabo, a resident individual employed by RU Consulting (Pty) Ltd, earns a basic salary of R600 000 for the 2025 year.
He receives:
- 13th cheque bonus: R50 000.
- Use of a company car costing R300 000 (incl VAT) from 1 March 2024 to 28 Feb 2025.
- Employer pays all running costs and fuel.
- Thabo keeps a detailed logbook:
  - Total kilometres: 30 000 km.
  - Business kilometres: 18 000 km.
- Low‑interest loan of R100 000 at 2% p.a. for the full year; official rate 9% p.a.
Thabo contributes R20 000 towards the running costs of the car during the year.

Required in exam: Compute gross income from employment (ignore retirement fund and medical credits).

Solution outline:

Cash remuneration:
- Salary: R600 000.
- Bonus: R50 000.
- Subtotal: R650 000.
Company car fringe benefit:
- Determined value: R300 000.
- Assume SARS formula: 3.5% per month → 3.5% × R300 000 = R10 500 per month.
- Yearly fringe benefit before adjustments: R10 500 × 12 = R126 000.
- Business use proportion = 18 000 / 30 000 = 60%.
- Private use = 40%.
- Private‑use portion: R126 000 × 40% = R50 400.
- Less employee contribution: R20 000.
- Net taxable car fringe benefit = R50 400 − R20 000 = R30 400.
Low‑interest loan fringe benefit:
- Official interest: 9% × R100 000 = R9 000.
- Actual interest: 2% × R100 000 = R2 000.
- Fringe benefit: R9 000 − R2 000 = R7 000.
Total gross income from employment:
- Cash remuneration: R650 000.
- Car fringe: R30 400.
- Loan fringe: R7 000.
- Total = R687 400.

Exam expectations:

Correct identification of each element as gross income.
Correct application of formulae for fringe benefits.
Demonstrate gross income before any deductions or rebates.

3. Capital Gains Tax (CGT) – Eighth Schedule Focus for TAX301

3.1 CGT Basics – Structure and Key Concepts

CGT in South Africa is integrated into income tax via:

s26A of the ITA: Includes taxable capital gain in taxable income.
Eighth Schedule: Sets out detailed rules.

Steps for CGT calculation (for a person other than a company for exam purposes):

Identify disposal event.
Determine proceeds (para 35).
Determine base cost (para 20).
Calculate capital gain/loss = proceeds − base cost.
Apply annual exclusion (natural persons and special trusts only).
Apply any rollover relief if applicable.
Aggregate all gains and losses to find net capital gain.
Multiply by inclusion rate to get taxable capital gain.
Include taxable capital gain in taxable income under s26A.

3.2 When Does CGT Apply? – Asset Types and Disposals

CGT applies to:

Assets as defined in para 1:
- Property of whatever nature, whether movable or immovable, corporeal or incorporeal.
- Includes shares, rights, goodwill, intellectual property, cryptocurrency, etc.

Disposals (para 11):

Sale, donation, exchange, expropriation, scrapping, distribution, etc.
Deemed disposals:
- Ceasing to be resident (para 12) – exit charge.
- Conversion from trading stock to capital asset (or vice versa).
- Certain distributions by trusts, companies (e.g. share buy‑backs, liquidation distributions).

Non‑Residents – CGT is limited to immovable property in SA and assets of a permanent establishment in SA, and certain rights linked to SA immovable property.

3.3 Proceeds and Base Cost

Proceeds (para 35):

Amount received or accrued from disposal.
Market value is used if:
- Disposal is not at arm’s length.
- Consideration is not quantifiable.
- Asset is donated.

Exclusions from proceeds:

Amounts included in gross income (to prevent double taxation).
Certain recoupments – treated under normal tax, not as proceeds for CGT.

Base Cost (para 20):

Includes:

Acquisition cost of asset.
Improvements and enhancements (not repairs).
Transfer costs, legal fees, valuation fees, auctioneer’s fees, etc.
Certain holding costs for pre‑valuation date assets (if time‑apportionment is chosen).

Excluded from base cost:

Amounts previously deductible for income tax (e.g. repairs already deducted).
Interest and finance charges (unless capitalised in limited circumstances for pre‑valuation date calculations).

3.4 Annual Exclusion and Inclusion Rates

For natural persons and special trusts:

Annual exclusion (para 5): First R40 000 of net capital gain/loss per year (typical exam assumption, confirm latest value).
In year of death, the exclusion is increased (e.g. R300 000 in many exam regimes).

Inclusion rates (typical rates used in many recent exam years; always check your prescribed tax tables):

Individuals and special trusts: 40% of net capital gain is included in taxable income.
Companies: 80%.
Trusts (other than special trusts): 80%.

Exam questions for Rhodes University TAX301 typically specify applicable rates in annexures; use those rates even if they differ slightly from current real‑world rates.

3.5 Primary Residence Exclusion

For natural persons only, a primary residence receives special relief:

First R2 million of capital gain (or loss) on disposal of primary residence is disregarded (para 45).
Limited to residences on land of up to 2 hectares used mainly for domestic purposes.
Primary residence must be used mainly for domestic residential purposes by the owner or their spouse.

Key exam considerations:

Determine qualifying period where house was primary residence.
Time‑apportion if used partly for trade or rental.
Apply R2 million exclusion after other adjustments (e.g. portion for business use).

Example:

Selling price: R5 000 000.
Base cost: R2 000 000.
Capital gain: R3 000 000.
Assume fully used as primary residence (no business use).
Primary residence exclusion: R2 000 000.
Net capital gain: R1 000 000.
Annual exclusion: R40 000.
Remaining capital gain: R960 000.
Taxable capital gain for an individual (40% inclusion): R960 000 × 40% = R384 000.

3.6 CGT on Cessation of Residence – Exit Charge

When an individual or company ceases to be a resident:

Deemed disposal at market value of all assets worldwide immediately before ceasing residence (para 12).
Exclusions:
- SA immovable property.
- Certain assets of a permanent establishment in SA.
- Assets excluded from CGT (e.g. personal‑use assets, certain retirement fund interests).

Exam focus:

Identify assets subject to exit CGT.
Apply annual exclusion in year of exit.
Consider any DTA or administrative aspects (e.g. values at date of exit).

3.7 Integrated CGT Example at TAX301 Level

Scenario:

Nandi, a resident individual, disposes of several assets during the 2025 year:
1. Listed shares:
  - Bought for R120 000 in 2022.
  - Sold for R200 000 in June 2024.
  - Brokerage and sale costs: R2 000.
2. Primary residence:
  - Bought for R1 000 000 in 2010.
  - Sold for R3 800 000 in December 2024.
  - Used 80% for domestic purposes and 20% as a home office (trade) throughout ownership.
  - Selling costs: R100 000 (agent commission, legal).
3. Personal‑use asset (furniture):
  - Bought for R30 000.
  - Sold for R50 000.

Required: Determine Nandi’s taxable capital gain for 2025 (ignore rate changes; use R40 000 annual exclusion and 40% inclusion).

Solution outline:

Listed shares:
- Proceeds: R200 000.
- Base cost: R120 000 + R2 000 = R122 000.
- Capital gain: R78 000.
Primary residence:
- Proceeds: R3 800 000.
- Base cost: R1 000 000 + R100 000 = R1 100 000.
- Total capital gain: R2 700 000.
- Apportion for trade use (20% home office):
  - Gain attributable to domestic use (80%): R2 700 000 × 80% = R2 160 000.
  - Gain attributable to business use (20%): R2 700 000 × 20% = R540 000.
- Apply primary residence exclusion only to domestic portion:
  - Domestic gain: R2 160 000 − R2 000 000 (primary residence exclusion) = R160 000.
  - Trade portion: R540 000 (no primary residence exclusion).
- Total capital gain from property = R160 000 + R540 000 = R700 000.
Personal‑use asset:
- Personal‑use asset gains for individuals are generally disregarded (para 53).
- Capital gain from personal‑use assets is ignored; likewise, capital losses are not allowed.
- Therefore, no CGT impact.
Aggregate capital gains:
- Shares: R78 000.
- Primary residence: R700 000.
- Total gains: R778 000.
- Less annual exclusion: R40 000.
- Net capital gain: R738 000.
Taxable capital gain:
- Inclusion rate 40% → R738 000 × 40% = R295 200 included in taxable income.

Exam markers expect:

Clear, step‑by‑step structure.
Proper application of primary residence exclusion only to domestic use portion.
Correct use of annual exclusion and inclusion rate.

4. Corporate Taxation and Dividends – Advanced Issues for TAX301

4.1 Corporate Tax Framework in South Africa

Companies are taxed separately from their shareholders:

Flat corporate tax rate (e.g. 27% in many recent years; always use exam table rate).
Dividends tax of 20% on dividends paid to shareholders (subject to exemptions and reduced treaty rates).
Capital gains taxed by including 80% of net capital gain in taxable income.

For Rhodes University TAX301, typical corporate taxation outcomes include:

Determining taxable income of a company.
Handling capital allowances (wear‑and‑tear, s12C, s13).
Treating assessed losses.
Understanding dividends tax and shareholder vs company level taxation.
Group relief concepts like intragroup relief (s45) might be introduced at conceptual level.

4.2 Determination of Taxable Income – Companies

Basic formula:

Taxable income = Gross income
− Exempt income
− Deductions allowed in terms of s11, s12, etc.

Add‑backs (e.g. disallowed expenses, recoupments)
− Assessed losses brought forward.

Key distinctions vs individuals:

Companies do not receive many of the individual allowances (e.g. medical, retirement annuity deductions are usually not relevant).
Certain capital allowances are more prominent (e.g. manufacturing allowances, building allowances).
Interest limitation rules (e.g. s23M) and anti‑avoidance can apply in complex exams.

Common deduction sections in TAX301 corporate questions:

s11(a) – General deduction formula.
s11(e) – Wear and tear (depreciation) on machinery, equipment.
s11(o) – Scrapping allowance.
s12C, s12E, s13, s13quin – Accelerated allowances (industrial buildings, small business corporations, etc.).
s23(g) – Prohibition of expenses not incurred in production of income.

4.3 Dividends and Dividends Tax (s64D – s64N)

When a company resident in SA declares a dividend:

Dividends tax of 20% is withheld and paid to SARS by the company or regulated intermediary.
The shareholder is the taxpayer, but the company is responsible for withholding.
Certain shareholders may be exempt:
- Other resident companies.
- Certain retirement funds.
- Public benefit organisations.
- Non‑residents under specific DTA provisions (reduced rate).

For exam purposes:

Dividends received by a resident individual are:
- Exempt from normal tax (s10(1)(k)), but
- Subject to 20% dividends tax (unless exempt).
Dividends received by a resident company from another resident company are generally exempt from both normal tax and dividends tax (participation exemption).

4.4 Corporate CGT Calculation – Example

Consider:

RU Manufacturing (Pty) Ltd is a resident company.
It disposes of a machine used in production for R500 000 (proceeds).
The machine cost R600 000 and is subject to s12C allowances.
Tax value (remaining tax base) at disposal date: R300 000.
The machine is a depreciable asset, so both income tax (recoupment) and CGT rules are relevant.

Steps:

Determine recoupment (s8(4)(a)):
- Recoupment = Proceeds (limited to original cost) − Tax value.
- Limited proceeds: min(R500 000, R600 000) = R500 000.
- Recoupment = R500 000 − R300 000 = R200 000.
- This R200 000 is ordinary income included in taxable income.
CGT component:
- For depreciable assets, portion up to original cost is recoupment, excess may be capital gain.
- Proceeds: R500 000.
- Base cost: R600 000.
- Since proceeds < base cost, no capital gain; in fact, a potential capital loss.
- However, where allowances have been claimed and recoupment applies, any remaining difference needs careful treatment:
  - Here, proceeds (R500 000) < base cost (R600 000) → theoretical capital loss R100 000.
- Capital loss: R500 000 − R600 000 = −R100 000 (capital loss), subject to rules on depreciable assets and corporate CGT.
Taxable capital gain:
- Since it’s a capital loss, it may be offset against other capital gains, but cannot reduce normal income.
- If net result for company is a net capital loss, carry forward for future CGT.

With corporate CGT:

Aggregate all capital gains and losses.
Apply 80% inclusion rate to net gain, if any.

4.5 Corporate Tax Case Study – TAX301 Integrated Question

Scenario:

Makhanda Traders (Pty) Ltd, a resident company, prepares accounts to 28 February each year.
For the year ended 28 Feb 2025, the following figures (pre‑tax) are given:
- Sales revenue: R5 000 000.
- Cost of sales: R3 000 000.
- Operating expenses (all allowable under s11(a), except where indicated): R800 000.
- Included in operating expenses:
  - Fines for late submission of PAYE returns: R10 000.
  - Depreciation (accounting) on machinery: R120 000.
- Dividends received from a listed resident company: R50 000.
- Profit on sale of an old delivery vehicle: R40 000 (accounting profit).
- Tax data for vehicle:
  - Cost: R200 000.
  - Tax value at disposal: R80 000.
  - Selling price: R240 000.
No assessed loss brought forward.

Required: Compute taxable income and normal tax liability (assume corporate tax rate 27%, dividends received are exempt from normal tax, inclusion rate for CGT is 80%).

Solution outline:

Accounting profit before tax (for reference only):
- Sales: R5 000 000.
- Cost of sales: (R3 000 000).
- Gross profit: R2 000 000.
- Operating expenses: (R800 000).
- Profit before investment income and other items: R1 200 000.
- Add dividends: R50 000.
- Add profit on sale of vehicle (accounting): R40 000.
- Accounting profit before tax: R1 290 000.
Start with accounting profit and adjust for tax:
- Accounting profit before tax: R1 290 000.
Add back non‑deductible expenses:
- Fines (s23): R10 000.
- Depreciation (R120 000) – not tax‑deductible; must be replaced with wear‑and‑tear.
Subtotal add‑backs: R130 000.

Adjusted profit: R1 290 000 + R130 000 = R1 420 000.
Replace accounting depreciation with tax wear‑and‑tear:
- Assume SARS wear‑and‑tear on machinery for year: R150 000 (given in exam annexure, typical).
- Deduct: R150 000 (allowed s11(e) deduction).
Adjusted profit: R1 420 000 − R150 000 = R1 270 000.
Dividends received:
- Dividends of R50 000 from resident company are exempt income (s10(1)(k)).
- Exempt income must be deducted from accounting profit (since included earlier).
- Less: R50 000.
Adjusted profit: R1 270 000 − R50 000 = R1 220 000.
Sale of vehicle – reconcile accounting profit with tax effects:
- Accounting profit on sale: R40 000 (already included in P&L).
- Tax calculation:
  - Cost: R200 000.
  - Tax value: R80 000.
  - Selling price: R240 000.
Recoupment:
- Recoupment = min(proceeds, cost) − tax value = min(240 000, 200 000) − 80 000 = 200 000 − 80 000 = R120 000.
- This is ordinary income per s8(4)(a).
Capital gain:
- Proceeds exceeding cost may give rise to a CGT element:
  - Excess over cost = 240 000 − 200 000 = R40 000 capital gain.
- Accounting profit (R40 000) represents only the difference between book value and proceeds, not necessarily equal to recoupment + capital gain, so must be adjusted.
To reconcile:
1. Remove accounting profit:
  - Subtract R40 000 (as it is not the correct tax figure).
  - Adjusted profit: R1 220 000 − R40 000 = R1 180 000.
2. Add recoupment:
  - Add R120 000 (ordinary income).
  - Adjusted profit: R1 180 000 + R120 000 = R1 300 000.
3. Deal with capital gain separately in CGT section.
Corporate CGT:
- Capital gain: R40 000.
- No other disposals given.
- Net capital gain = R40 000.
- Inclusion rate 80% → taxable capital gain = R40 000 × 80% = R32 000.
Add taxable capital gain to taxable income figure.
Taxable income:
- Current “normal income” figure: R1 300 000.
- Add taxable capital gain: R32 000.
- Taxable income = R1 332 000.
Normal tax:
- Taxable income: R1 332 000.
- Corporate tax rate 27%.
- Normal tax = R1 332 000 × 27% = R359 640.

Exam markers look for:

Proper structure: start with accounting profit, then adjustments.
Correct treatment of dividends (exempt), fines (disallowed), depreciation vs wear‑and‑tear, recoupment and CGT split.
Use of company CGT inclusion rate.

5. Tax Planning, Anti‑Avoidance and Exam Strategy (TAX301 Perspective)

5.1 Tax Planning vs Tax Avoidance vs Tax Evasion

In TAX301, conceptual understanding of ethical tax planning vs abusive avoidance is essential:

Tax planning:
- Legitimate arrangement of affairs to minimise tax within the law.
- Examples:
  - Choosing between debt vs equity in a tax‑efficient way.
  - Timing disposals to use annual CGT exclusions.
  - Utilising allowances and incentives (e.g. s12C, s13).
Tax avoidance (impermissible):
- Arrangements that, while formally within the law, abuse legal form to obtain tax benefits contrary to legislative intent.
- Targeted by General Anti‑Avoidance Rules (GAAR) in Part IIA (s80A – s80L).
Tax evasion:
- Illegal conduct: not declaring income, creating fake expenses, etc.
- Criminal offence, subject to penalties and prosecution.

Rhodes University exam questions may provide scenarios where a structure appears artificial, requiring application of GAAR principles.

5.2 General Anti‑Avoidance Rules (GAAR) – Part IIA

GAAR applies where an arrangement:

Is an “avoidance arrangement” – main purpose (or one of the main purposes) is to obtain a tax benefit; and
Is found to be impermissible because it:
- Lacks commercial substance (s80C),
- Creates rights and obligations not normally created between parties dealing at arm’s length,
- Misuses or abuses the provisions of the Act.

Key GAAR concepts:

Tax benefit:
- Any avoidance, reduction or postponement of tax liability.
Lack of commercial substance:
- No significant effect upon business risks or net cash flows, apart from tax benefit.
- Round‑trip financing, circular transactions, or transactions involving tax‑indifferent parties.
Abnormality:
- Manner in which the arrangement was carried out is not normally used for bona fide purposes.

SARS remedies under GAAR:

Disallow tax benefit (e.g. deny deduction, disregard step in series).
Recharacterise transaction to reflect genuine substance.
Treat connected parties as if transaction happened at arm’s length.

Exam application:

Identify whether arrangement clearly aims at obtaining a tax benefit.
Evaluate if there is lack of commercial substance or abnormal features.
Conclude whether GAAR could apply and what the consequences are.

5.3 Specific Anti‑Avoidance Provisions (Examples)

Apart from GAAR, the ITA contains specific anti‑avoidance rules:

s23M – Limits deductibility of interest in certain related‑party or cross‑border funding structures.
s23N – Interest limitation on certain reorganisation transactions.
Dividends stripping rules (e.g. s22B, para 43A) – Anti‑avoidance when companies avoid tax by distributing dividends before selling shares.
Hybrid debt and hybrid equity rules (s8F, s8FA) – Recharacterises certain interest/dividends where instruments have debt/equity hybrid nature.

TAX301 typically introduces these at a conceptual level rather than requiring full technical calculations. Focus is on:

Recognising the policy rationale.
Indicating why certain structures are problematic (e.g. interest stripping, base erosion).

5.4 International Tax Elements – DTAs and Withholding Taxes

With an increasing emphasis on cross‑border transactions, Rhodes University TAX301 often tests:

Double Tax Agreements (DTAs):
- Prevent double taxation and allocate taxing rights.
- Concepts like permanent establishment, beneficial owner, and tie‑breaker tests for residence.
Withholding taxes in SA:
- Dividends tax – 20% (discussed earlier).
- Interest withholding tax on SA‑source interest to non‑residents (currently 15% in practice; exam scenarios may vary).
- Royalty withholding tax – typically 15% on SA‑source royalties paid to non‑residents.

Exam approach to international tax question:

Confirm whether payer is resident or non‑resident and whether income has SA source.
Identify applicable withholding tax and rate.
Determine if DTA reduces rate (e.g. interest tax reduced from 15% to 10%).
Discuss whether the income is also taxed in recipient’s residence country, and potential credits.

5.5 Exam Strategy for TAX301 (Rhodes University BCom Accounting)

A strong performance in TAX301: Taxation III typically requires:

5.5.1 Mastering Structure and Technique

Use a consistent, logical layout:
- For individual tax:
  1. Gross income (per source).
  2. Less exempt income.
  3. Less deductions.
  4. Add taxable capital gain (CGT).
  5. Arrive at taxable income, then apply tax tables and rebates.
- For company tax:
  - Start from accounting profit → add back non‑deductibles → adjust for allowances and recoupments → handle CGT separately → arrive at taxable income.
Show workings clearly:
- Each adjustment must be referenced to relevant Act section (e.g. “disallowed per s23(g)”).
- Use headings: “CGT calculation”, “Fringe benefits”, “Dividends tax”.
Time management:
- Allocate time proportionally to marks (e.g. 1 mark per 1 – 1.5 minutes).
- Do theory questions (e.g. GAAR, residence tests) first if they come easily; they are high‑scoring with less risk of arithmetic errors.

5.5.2 Common Pitfalls and How to Avoid Them

Mixing up gross income and taxable income:
- Always separate gross income logic from deduction logic.
- Do not deduct expenses against exempt income.
Capital vs revenue confusion:
- Use intention, frequency, holding period, and surrounding circumstances to classify each item.
- Remember that CGT deals with capital items; trading profits fall under normal income.
Ignoring fringe benefits:
- If an exam question mentions company car, housing, loans, phones, or subsidised facilities, it almost always signals fringe benefit treatment.
- Refer to Seventh Schedule and relevant SARS tables in annexure.
Wrong CGT sequence:
- Forgetting the annual exclusion for individuals.
- Applying inclusion rate directly to each gain instead of to the aggregate net capital gain.
Neglecting anti‑avoidance:
- When a question hints at complex intra‑group transactions, circular funding, or artificial steps, discuss GAAR and/or specific anti‑avoidance even if calculations appear correct.

5.5.3 Linking TAX301 to Other University Courses

Students at Rhodes University (RU) often cross‑reference TAX301 concepts with modules at other SA institutions:

UNISA TAX3701 / TAX3702 study notes:
- Similar emphasis on individual and corporate taxation, residency, CGT, and fringe benefits.
- Taxation III students can use UNISA tutorials for extra question practice.
Central University of Technology (CUT) TAX36AT / ACT36AT exam notes:
- Corporate tax and CGT topics overlap significantly.
- CUT’s focus on applied computations complements Rhodes’ conceptual emphasis.

While this guide is tailored to Rhodes University (RU): BCom Accounting – TAX301, using additional past papers and online resources labeled as “taxation 3 exam notes”, “unisa tax3701 cg exam prep”, and “cut tax36at study notes” can help diversify practice questions, provided that the legislative year and rates align with your exam.

5.6 Final Revision Checklist for TAX301

A concise checklist to use during final revision:

Residency and source
- Ordinary residence and physical presence tests.
- Company residence and place of effective management.
- Source rules for employment, interest, royalties, business, property.
Individuals – income and deductions
- Gross income definition and inclusions.
- Fringe benefits (motor vehicles, accommodation, loans).
- Selected exemptions – s10(1)(o)(ii), scholarships, local dividends.
- General deductions, retirement fund contributions (if examinable), and interest limitations.
CGT
- Identify assets and disposal events.
- Determine proceeds and base cost.
- Apply annual exclusion and inclusion rates.
- Primary residence exclusion, personal‑use assets treatment.
- Exit CGT on ceasing residence.
Companies
- Determination of taxable income from accounting profit.
- Capital allowances, wear‑and‑tear, recoupments.
- Dividends and dividends tax, participation exemption.
- Corporate CGT and 80% inclusion rate.
Anti‑avoidance and international
- GAAR – s80A to s80L.
- Specific anti‑avoidance (interest limitations, hybrid instruments).
- DTAs – residence tie‑breaker, permanent establishment, withholding taxes.
Exam skills
- Show all workings; label every step.
- Use correct year of assessment and tax rates (from exam annexure).
- Manage time; do not over‑spend on one calculation.
- Always answer the question asked (e.g. “taxable income” vs “normal tax liability” vs “tax consequences for all parties”).

A methodical approach grounded in the Income Tax Act and consistent practice with Rhodes University TAX301 past exam papers will place students in a strong position to excel in Taxation III and to bridge into postgraduate tax studies or SAICA professional examinations.