ETAX3714 Taxation Exam Pack (UFS BAcc) – Comprehensive Study Guide

This guide provides exam-focused, curriculum-aligned notes for ETAX3714 Taxation as offered in the BAcc programme at the University of the Free State (UFS). It is structured to mirror the way questions are commonly set in South African undergraduate taxation modules, including those at UFS, UNISA (e.g. TAX3701, TAX3702) and similar modules at CUT. The emphasis is on South African tax law, with a focus on individuals, companies, capital gains tax, VAT and exam technique. Use it together with your ETAX3714 tutorial letters, prescribed legislation (Income Tax Act 58 of 1962, VAT Act 89 of 1991) and past papers.

1. Overview of ETAX3714 Taxation (UFS BAcc) and Exam Strategy

1.1 Position of ETAX3714 in the BAcc Curriculum

ETAX3714: Taxation is a core intermediate taxation module in the Bachelor of Accounting (BAcc) at the University of the Free State (UFS). It typically follows introductory accounting and law modules, and it often runs in parallel with or just after:

• FRK2714 / FRK2724 (Financial Accounting)
• MAC2714 (Management Accounting)
• LEGL2714 (Commercial Law)
• Other third-year modules such as ETHY3714 (Ethics) in the professional stream.

Comparable modules at other institutions include:

• UNISA TAX3701: Taxation – Individuals
• UNISA TAX3702: Taxation – Companies and Other Entities
• CUT TAX370 / TAX371 (module codes vary by year)

ETAX3714 consolidates tax knowledge required for later specialist courses (e.g. postgraduate Taxation and SAICA ITC preparation). It expects you to be comfortable with:

• Basic accounting (debits, credits, financial statements).
• Business structures (sole proprietors, partnerships, companies, trusts).
• Elementary legal concepts (contracts, residence, legal versus beneficial ownership).

1.2 Core Topics Typically Examined in ETAX3714

While exact year-to-year emphasis can shift, the following clusters are consistently examinable in ETAX3714 and parallel modules like UNISA TAX3701/TAX3702:

1. South African Tax Framework & Residence

   • Sources of tax law (Acts, case law, SARS practice).
   • Residence of natural persons and juristic persons.
   • Source vs residence basis, SA’s residence-based system.

2. Gross Income and Exempt Income

   • Definition of gross income (par 1 of the First Schedule / s1).
   • Inclusions: salary, wages, allowances, fringe benefits, interest, foreign income.
   • Exemptions (s10, s exempting interest, dividends, foreign pension portions).

3. Deductions and Assessed Losses

   • General deduction formula (s11(a) + s23(g) limitations).
   • Specific deductions: s11(e) wear-and-tear, s11(i), s11(j), s13–s13quin for buildings, etc.
   • Prohibited deductions: fines, domestic expenses, private expenses.

4. Taxation of Individuals

   • Determining taxable income of natural persons.
   • Tax tables, rebates, tax thresholds, primary residence exemption for CGT.
   • Fringe benefits (Seventh Schedule), allowances (travel, subsistence).

5. Taxation of Companies and Close Corporations

   • Corporate tax rate (e.g. 27% from years of assessment ending on/after 31 March 2023).
   • Dividends tax (currently 20%) and STC history (if still examined historically).
   • Assessed losses in companies, group relief (if included in curriculum).

6. Capital Gains Tax (CGT)

   • Basic principles (assets, disposals, base cost).
   • Inclusion rates (e.g. 40% for individuals, 80% for companies – check latest rates).
   • Specific exclusions and roll-overs (primary residence, personal-use assets).

7. Value-Added Tax (VAT)

   • Vendors, compulsory and voluntary registration thresholds.
   • Standard-rated, zero-rated and exempt supplies.
   • Output vs input tax, invoice basis vs payments basis.

8. Provisional Tax

   • Who is a provisional taxpayer.
   • First and second provisional payments, penalties, interest.

Not all details of every topic will be tested in one exam, but each of these areas is a standard exam target in modules such as ETAX3714 (UFS), UNISA TAX3701/TAX3702, and corresponding CUT BAcc taxation modules.

1.3 Exam Format and Question Types

The ETAX3714 exam typically consists of a mixture of:

• Long-form calculation questions (e.g. compute taxable income and normal tax payable).
• Scenario-based application questions (interpret legislation, classify receipts/expenses).
• Short discussion/theory questions (state tests for residence, compare capital vs revenue).
• CGT and VAT sub-questions integrated into larger scenarios.

Common structures:

1. Question 1 – Individuals (40–60 marks)

   • Salary, fringe benefits, retirement fund contributions.
   • Business side-income (sole proprietor), allowable deductions.
   • CGT on disposal of assets (primary residence, share portfolios).

2. Question 2 – Companies (25–40 marks)

   • Gross income/deductions of a company.
   • Wear-and-tear, allowances, capital vs revenue classification.
   • Dividends tax calculation and disclosure.

3. Question 3 – VAT (20–30 marks)

   • Vendor registration and adjustments.
   • Output tax calculation on sales.
   • Input tax on purchases, apportionment if mixed supplies.

4. Question 4 – CGT & Miscellaneous (15–30 marks)

   • Standalone CGT problem (disposal of investment properties, shares).
   • Short theory: residence, exempt income, anti-avoidance, ethics.

Weightings vary, but individual income tax plus CGT almost always carries the greatest mark share in ETAX3714 and similar courses like UNISA TAX3701.

1.4 Study and Exam Technique for ETAX3714

1. Know your legislation references.
Marker expectations (across UFS, UNISA, CUT) usually include:

• Quoting section numbers where practical (e.g. “s11(a)”, “s10(1)(o)(ii)”).
• Using correct tax terminology (e.g. “gross income”, “normal tax”, “assessed loss”).

2. Show structured workings.
In calculation questions:

• Start with Gross income, then Less: Exempt income, then Less: Deductions, then Add: Taxable capital gain.
• Clearly label each deduction and reference the relevant section.
• Use sub-totals for each income source (salary, trade, investments).

3. Allocate time according to marks.

• If exam is 3 hours and 100 marks, you have about 1.8 minutes per mark.
• A 40-mark question ≈ 72 minutes. Budget your approach accordingly:
  • 5–10 minutes reading and planning.
  • The rest performing calculations and writing conclusions.

4. Start with the biggest marks, but don’t leave theory for last minute.

• Many students at UFS and UNISA lose easy theory marks because they rush.
• Move on if stuck; return later if time allows.

5. Use past exam patterns.

• Past papers for ETAX3714 (UFS) and UNISA TAX3701/TAX3702 show consistent patterns:
  salary packages + fringe benefits; travel allowance; CGT on share disposals; VAT trade examples.
• Practise with a timer to simulate exam pressure.

2. South African Income Tax Framework and Individual Taxation (ETAX3714 / UNISA TAX3701 Alignment)

2.1 Tax Residence and Scope of Taxation

South Africa uses a residence-based system for income tax:

• Residents are taxed on worldwide income, subject to specific exclusions/exemptions (e.g. s10(1)(o)(ii) foreign employment exemption).
• Non-residents are taxed only on South African-source income and certain deemed-source amounts.

2.1.1 Residence: Natural Persons

A natural person is a resident if:

1. Ordinarily resident in South Africa; or
2. Meets the physical presence test (and is not otherwise treaty-resident elsewhere).

Ordinarily resident test (case law driven, not strictly mechanical):

• Where is the taxpayer’s real home?
• Where is family, business and social life centred?
• Intention to reside indefinitely or return after overseas assignments.

Physical presence test (s1):

To be resident under this test, all three requirements must be met:

1. More than 91 days in South Africa in the current year of assessment;
2. More than 91 days in each of the five preceding years of assessment; and
3. More than 915 days in total during those five preceding years.

If all three conditions are satisfied, the person becomes a resident from the first day in the sixth year. If the person is absent from SA for a continuous period of at least 330 full days, they cease to be resident under the physical presence test from the day they left.

Exam tip (ETAX3714 / UNISA TAX3701 / CUT):
When given travel dates, construct a timeline to check the 91/915-day thresholds. State whether you are applying the ordinary residence or physical presence test.

2.1.2 Residence: Companies and Other Juristic Persons

A company (including CCs, co-operatives, certain trusts) is a resident if it is:

• Incorporated in South Africa, or
• Effectively managed in South Africa (central management and control).

Exceptions: Certain foreign-incorporated companies that are treaty residents elsewhere are excluded from South African tax residence.

Why this matters for ETAX3714:
In questions comparing a UFS BAcc graduate working in Johannesburg versus one seconded to Dubai, you must identify who is resident and explain the consequence (worldwide vs source-based tax).

2.2 Definition of Gross Income

Gross income (s1 of the Income Tax Act) is:

"the total amount, in cash or otherwise, received by or accrued to or in favour of a resident, or from a source within the Republic in the case of a non-resident, during the year of assessment, excluding receipts or accruals of a capital nature, but including specific statutory inclusions."

Key elements:

1. Total amount – includes cash and non-cash (e.g. fringe benefits) valued at market value.
2. Received by / accrued to –
   • Received: actually or constructively received.
   • Accrued: unconditional entitlement; amount becomes due and payable.
3. During the year of assessment – usually 1 March–end of February for natural persons.
4. Excluding capital nature – unless a specific inclusion (e.g. CGT provisions).

Statutory inclusions (paragraphed in the definition and other sections):

• Dividends (more relevant for companies and individuals – some exempt, some partially).
• Fringe benefits (Seventh Schedule).
• Lump sum benefits from retirement funds (subject to specific lump sum tables).

2.3 Common Income Items in ETAX3714 Individual Questions

Typical Exam Pack‑style scenarios across UFS ETAX3714 and UNISA TAX3701 include:

1. Employment income

   • Salary, overtime, bonuses, commission.
   • Leave pay, retrenchment packages (portions taxable, portions potentially tax-favored).
   • Fringe benefits (company car, interest-free loan, use of holiday home, free or cheap assets).

2. Allowances

   • Travel allowance: portion deemed to be for business; logbook essential.
   • Subsistence allowance: deemed amounts per SARS daily rates.

3. Investment income

   • Interest from SA banks (partially exempt for individuals).
   • Dividends from SA companies (usually exempt for normal tax but subject to dividends tax).
   • Rental income from property (less allowable deductions).

4. Business/Trading income

   • Sole proprietor’s revenue.
   • Professional practice receipts (consulting, tutoring, online services).

In exam-style computations, list each source separately, then combine for gross income.

2.4 Exempt Income Relevant to Individuals (s10)

Key exemptions regularly tested in ETAX3714, UNISA TAX3701 and similar courses:

1. Local dividends (s10(1)(k))

   • Generally exempt for individuals from normal tax.
   • Subject to 20% dividends tax at shareholder level (unless exemption forms submitted, e.g. for PBOs).

2. Foreign dividends (partially taxed)

   • Certain formula-based exemptions may apply.
   • Not usually the primary focus at undergraduate level but may appear in integrated questions.

3. Interest exemptions (s10(1)(i)) for individuals:

   • Individuals under 65: first R23 800 (stated as an example; check current figure).
   • Individuals 65 and older: first R34 500 (example; verify current year’s threshold).
     Only South African-source interest qualifies. Foreign interest is generally not exempt.

4. Foreign employment income (s10(1)(o)(ii))

   • For residents who work abroad for an employer, at least 183 days outside SA, including a continuous 60‑day period, may qualify for a limited exemption up to a cap (e.g. R1.25 million; confirm current amount).
   • Amounts above the cap remain taxable.

5. Certain Pensions and Social Grants

   • Portions may be exempt depending on source and type, especially foreign social security.

Exam habit:
When compiling gross income, list all amounts, then deduct exempt income below gross income to arrive at income. Do not simply omit exempt items; they often must be disclosed.

2.5 General Deduction Formula: s11(a) and s23(g)

The general deduction formula is central in ETAX3714 and equivalent modules (UNISA TAX3701, CUT TAX modules).

• Section 11(a): Allows a deduction of expenditure and losses actually incurred in the production of income, provided that such expenditure is not of a capital nature.
• Section 23(g): Disallows deductions to the extent that they are not laid out or expended for purposes of trade.

Essential elements for an allowable deduction under s11(a):

1. Actually incurred –

   • Not merely contingent or anticipated.
   • Contracted and unconditional.

2. In the production of income –

   • Direct or sufficiently close link to earning income.
   • Includes overheads like rent, salaries, advertising.

3. Not of a capital nature –

   • Capital vs revenue: long-term enduring benefit vs recurring operations.
   • The once-off purchase of a building is capital; monthly rent is revenue expenditure.

4. For purposes of trade (via s23(g)) –

   • Trade broadly includes profession, business, venture.
   • Hobby expenses may fail this test.

Typical deductions in an ETAX3714 individual question:

• Home office expenses (subject to strict requirements).
• Business travel (if allowance or logbook provided).
• Professional subscriptions directly related to employment.
• Donations to approved public benefit organisations (PBOs) within s18A limits.

Non-deductible items (exam favourites):

• Personal medical expenses (only qualifying medical expenses and contributions under specified formulas).
• Fines and penalties (e.g. SARS penalties).
• Private/household expenses (groceries, casual clothing).

2.6 Retirement Contributions and Medical Tax Credits

These areas align closely with UNISA TAX3701 content and frequently appear in ETAX3714.

2.6.1 Retirement Fund Contributions

Reform has unified deduction rules for pension, provident and retirement annuity fund contributions:

• Deductible up to 27.5% of the greater of:
  • Remuneration, or
  • Taxable income (before retirement deduction and excluding lump sums).
• Subject to an annual cap (e.g. R350 000; verify current amount).

Contributions above allowed deduction:

• Carried forward and treated as contributions in the following year.
• May also increase tax-free portion of later lump sums or annuities.

Exam tips:

• Show the calculation of the 27.5% limit and apply the monetary cap.
• Distinguish between employee contributions and employer contributions (fringe benefit to employee, then deduction allowed to employee, within limits).

2.6.2 Medical Scheme Fees Tax Credit (MTC) and Additional Medical Expenses Tax Credit (AMTC)

South Africa has shifted from deductions to tax credits for medical contributions:

1. MTC – fixed monthly credit per main member and per dependent.
   Example: R347 per month for the main member and first dependent, R234 for additional dependants (check current figures).

2. AMTC – credit based on qualifying medical expenses not recovered from a scheme:

   • For persons below 65 with no impairment:
     25% of (qualifying out-of-pocket + excess contributions) above a specified threshold (e.g. 7.5% of taxable income).
   • For persons 65+ or with a disability:
     33.3% of total qualifying expenses plus permissible excess contributions, with more generous formulae.

Undergraduate exams (ETAX3714 / TAX3701) often phrase such questions as:

• “Calculate the taxpayer’s medical tax credits for year of assessment ended 28 February 20XX.”

Approach:

• Determine number of months of membership.
• Calculate annual MTC.
• Apply the appropriate AMTC formula using given medical expenses and taxable income.

2.7 Comprehensive Example: Individual Tax Calculation (ETAX3714-Style)

Consider Lebo, a South African resident, aged 35, an employee of UFS in Bloemfontein.

Income and benefits:

• Salary: R480 000
• Bonus: R40 000
• Employer’s contribution to pension fund: R48 000
• Employee’s own pension contribution: R24 000 (deducted from salary)
• Local interest: R12 000
• Dividends from JSE-listed companies: R15 000
• Rental income (net of rates and levies): R60 000
• Medical scheme contributions: R3 000 per month (for Lebo and one dependent)
• Out-of-pocket medical expenses (qualifying): R8 000

Assumptions:

• Pension fund is approved.
• Year of assessment where:
  • Interest exemption (under 65): R23 800.
  • MTC: R347 per month for main member and first dependent.
  • Tax tables and exact credits would be provided in exam annexures (not reproduced here in full).

Step 1: Gross income

• Salary (after employee contributions are usually part of remuneration, but for tax: gross salary includes it, then deduction separately; assume R480 000 includes employee’s pension contributions for pattern consistency): R480 000
• Bonus: R40 000
• Employer pension contribution (taxed as fringe benefit): R48 000
• Local interest: R12 000
• Dividends (local, exempt for normal tax): R15 000
• Rental income: R60 000

Gross income (before exempt income):
= 480 000 + 40 000 + 48 000 + 12 000 + 15 000 + 60 000
= R655 000

Step 2: Exempt income

• Local dividends: R15 000 (s10(1)(k)) – exempt.
• Local interest exemption (Lebo under 65): R12 000 ≤ R23 800, so full R12 000 is exempt.

Total exempt income: R27 000

Step 3: Income

Income = Gross income – exempt income
= 655 000 – 27 000
= R628 000

Step 4: Deductions

1. Retirement fund deduction:

Total contributions deemed for Lebo (employee + employer as fringe benefit):
= 24 000 + 48 000 = 72 000

Apply 27.5% limit:

• 27.5% of greater of remuneration or taxable income (before this deduction) — assume remuneration approximates gross employment income, say 480 000 + 40 000 + 48 000 = 568 000.
  27.5% × 568 000 = 0.275 × 568 000 = R156 200 (below annual cap R350 000).

Contributions (72 000) < 156 200 => full 72 000 deductible.

2. Other deductions

• No additional trade expenses mentioned; rental income already net.

Total deductions = R72 000

Step 5: Taxable income before CGT

= Income – deductions
= 628 000 – 72 000
= R556 000

No CGT indicated, so Taxable income = R556 000.

Step 6: Normal tax before rebates

Apply individual tax tables (to be given in exam annexure). For illustration only (not current rates):

Suppose the marginal tax per SARS table is such that tax on R556 000 is R139 500 (hypothetical). In an ETAX3714 exam, you would:

• Use the given table.
• Show steps (tax to threshold + percentage of excess).

Step 7: Less: Rebates and medical credits

1. Primary rebate (e.g. R17 235 – example).

2. Medical tax credits (MTC):

Number of months = 12.
Main member + first dependent: 2 × R347 × 12 = 2 × 347 × 12
= 694 × 12 = R8 328

If no AMTC (assuming thresholds not met from extra calculation), total medical tax credit = R8 328.

Total credits (for illustration):
Primary rebate R17 235 + MTC R8 328 = R25 563.

Step 8: Net normal tax payable

= Tax before credits – rebates – credits
= 139 500 – 25 563
= R113 937 (illustrative).

In an actual ETAX3714 exam, you must apply exact tax tables and credit figures from the exam annexure. The process of classification, exemption and deduction shown above is the key to full marks.

3. Taxation of Companies and Corporate Transactions (ETAX3714 / UNISA TAX3702 Focus)

3.1 Corporate Tax Basics in South Africa

Companies (including private and public companies, and close corporations) are taxable entities in their own right.

Core points:

• Residents: taxed on worldwide income.
• Non-residents: taxed on income from SA source.
• Normal tax rate: For years of assessment ending on or after 31 March 2023, the corporate tax rate is 27% (previously 28%). Confirm the specific exam year’s rate, as ETAX3714 exams may test past or transitional years.
• Dividends tax: 20% at shareholder level on dividends paid by resident companies (subject to treaty reductions or exemptions).

In exams (ETAX3714, UNISA TAX3702, CUT Tax modules), you typically calculate:

• Taxable income of a company, then
• Normal tax at corporate rate, then
• Adjustments for dividends tax on distributions.

3.2 Gross Income and Specific Inclusions for Companies

A company’s gross income is determined similarly to that of an individual but with different exempt rules:

• Interest, royalties, rentals, service fees: fully included.
• Dividends from SA resident companies: generally exempt from normal tax (s10B), but may interact with CFC rules and controlled foreign company income at advanced levels.
• Foreign dividends: partly exempt based on participation exemption rules, depending on shareholding and tax treaties. At intermediate level, exam problems usually simplify to either fully exempt or fully taxable.

Examples of income items in ETAX3714 corporate questions:

• Sales and fees (core trading income).
• Interest on overdue trade receivables.
• Rental of surplus office space.
• Recoupments (e.g. on disposal of depreciated assets).

3.3 Deductible Expenditure and Capital Allowances for Companies

Companies may deduct:

1. Operating expenses under s11(a) and s23(g):

   • Salaries, wages, directors’ fees.
   • Rent, utilities, advertising, repairs (subject to capital vs revenue tests).
   • Legal expenses in the production of income.

2. Capital allowances:

   • Wear-and-tear (s11(e)): on movable assets (machinery, equipment, computers).
   • Special allowances:
     • s12C, s12E (for small business corporations), s13 (buildings used in manufacturing).
     • s13quin (commercial buildings from certain dates).

Exam-style approach:

• Identify cost, date of use, and category of asset.
• Apply SARS write-off periods (e.g. 3-year write off for certain manufacturing plant; 50:30:20 basis for some).
• Pro-rate for part of year if not used for entire year.

3.4 Assessed Losses and Set-off Rules

A company that makes a taxable loss in a year of assessment may carry forward an assessed loss to future years, provided it carries on trade.

Key rules:

• Assessed loss is set off against future taxable income from any trade.
• If a company ceases trade and cannot demonstrate intent to continue, SARS may disallow carried-forward loss (requires detailed facts).
• Recent legislative amendments introduced stricter limitation of set-off of assessed losses for companies in some years (e.g. limited to 80% of taxable income), but exam treatment depends on syllabus year.

In ETAX3714-type questions:

• You might be given: “Assessed loss brought forward: R120 000.”
• After computing taxable income before assessed loss, deduct up to the assessed loss in that year (subject to applicable rules).
  Example: Taxable income before loss: R100 000, assessed loss B/f: R120 000 ⇒ Taxable income after loss: R0, assessed loss C/f: R20 000.

3.5 Distributions and Dividends Tax

When companies distribute profits as dividends:

• Dividends tax (20%) is paid by the shareholder, but withheld and paid over by the company.
• Certain shareholders (e.g. South African resident companies, retirement funds, public benefit organisations) may be exempt if they submit a DIV exemption form to the company.

Example:

• Company declares cash dividend of R500 000 to natural person shareholders (no exemptions).
• Dividends tax = 20% × 500 000 = R100 000.
• Shareholders receive net cash = 500 000 – 100 000 = R400 000.
• Company must pay R100 000 to SARS by the due date.

For undergraduate exams like ETAX3714 and UNISA TAX3702:

• Dividends are exempt from normal tax in the shareholders’ hands (individuals) but subject to dividends tax.
• For companies receiving dividends, there may be a participation exemption; exam will either specify or simplify this.

3.6 Corporate Tax Computation Example (ETAX3714 / TAX3702 Level)

Consider Bloem Manufacturing (Pty) Ltd, a resident company with year end 28 February 20X3.

Information:

• Sales revenue: R3 000 000
• Cost of sales (opening + purchases – closing): R1 600 000
• Salaries and wages: R600 000
• Rent of factory: R120 000
• Telephone and internet: R40 000
• Interest received from SA bank: R30 000
• Dividends from SA listed company: R50 000
• Depreciation per income statement: R90 000
• Tax allowances (per schedule):
  • Machinery wear-and-tear (s11(e)): R70 000
  • Office equipment wear-and-tear (s11(e)): R10 000
• SARS fines for late VAT payment: R5 000

Step 1: Profit per income statement (if given)
If not, build from revenue and expenses directly.

Step 2: Compute taxable income

1. Gross income:

   • Sales revenue: R3 000 000
   • Interest: R30 000
   • Dividends (SA resident): R50 000
     Gross income before exempt = 3 080 000

2. Exempt income:

   • Dividends from SA resident company: R50 000 (s10(1)(k)).

   Income = 3 080 000 – 50 000 = R3 030 000

3. Allowable deductions:

Operating expenses under s11(a):

• Cost of sales: R1 600 000
• Salaries and wages: R600 000
• Rent: R120 000
• Telephone & internet: R40 000

Depreciation vs wear-and-tear:

• Accounting depreciation (R90 000) is not deductible.
• Instead, tax allowances:
  • Machinery: R70 000
  • Office equipment: R10 000
    Total wear-and-tear: R80 000

Non-deductible expenses:

• SARS fines: R5 000 (prohibited deduction).

Total deductible (excluding fines and depreciation):
= 1 600 000 + 600 000 + 120 000 + 40 000 + 80 000
= R2 440 000

Taxable income before assessed loss:
= Income – deductions
= 3 030 000 – 2 440 000
= R590 000

Assume no assessed loss brought forward.

Step 3: Corporate tax liability

Corporate tax @ 27% on 590 000
= 0.27 × 590 000
= R159 300

Step 4: Dividends tax (if dividend declared)

If Bloem Manufacturing declared a dividend of R200 000 to individual shareholders:

• Dividends tax = 20% × 200 000 = R40 000
• Normal tax not affected by dividend payment at company level.
• The question may require a journal entry or a note to state dividends tax payable of R40 000 and net dividend paid of R160 000.

3.7 Capital vs Revenue: Important for Corporate Exams

Both ETAX3714 and UNISA TAX3702 love testing capital vs revenue classification for corporate expenses and receipts. Consider:

• Sale of land held as an investment vs sale of trading stock properties.
  • Investment → capital gain (CGT).
  • Trading stock → revenue income.

Factors from case law (e.g. Richmond Estates, CIR v Pick ‘n Pay Employee Share Purchase Trust):

1. Taxpayer’s intention at acquisition.
2. Frequency of similar transactions.
3. Nature of the taxpayer’s business.
4. Method of financing (short-term borrowing often points to trading).
5. Way asset appears in books (fixed asset vs trading stock).

An incorrect classification can:

• Move a gain from CGT (with lower effective tax) to full normal tax; or
• Disallow depreciation/wear-and-tear on capital assets if misclassified.

Markers allocate marks for stating and applying these principles to the facts.

4. Capital Gains Tax (CGT) – Principles, Calculations and Exam Focus

4.1 CGT Framework in South Africa

CGT is not a separate tax; it is part of normal income tax.

• Introduced from 1 October 2001.
• Applies to disposals of assets on or after this date.
• For individuals:
  • Inclusion rate: commonly 40% (check exam-year rate).
  • Effective CGT rate = inclusion rate × marginal income tax rate.
• For companies:
  • Inclusion rate: commonly 80%.
  • Effective tax on capital gains = 80% × 27% = 21.6% (illustrative, depending on statutory rates).

4.2 Key CGT Concepts

1. Asset:

   • Wide definition: property of any kind, including tangible and intangible, and rights in such property.
   • Examples: immovable property, shares, unit trusts, cryptocurrency, intellectual property.

2. Disposal:

   • Any event, act or transaction that results in the creation, variation, transfer or extinction of an asset.
   • Includes selling, donation, scrapping, expropriation, exchange.
   • Deemed disposals: change in use, death, emigration in some cases.

3. Base cost:

   • Acquisition cost plus:
     • Direct costs (transfer duty, professional fees, broker’s commission).
     • Improvement costs (additions, extensions).
     • Certain holding costs in limited cases (for companies or if specifically allowed).

4. Proceeds:

   • Amount received or accrued on disposal, reduced by allowable costs incurred for disposal.

5. Capital gain / loss:

   • Gain = Proceeds – Base cost (if positive).
   • Loss = Base cost – Proceeds (if positive).

Capital losses:

• Can only be set off against capital gains, not against ordinary income.
• Unused capital losses are carried forward indefinitely.

4.3 Primary Residence and Other Key Exemptions

Primary residence exclusion for individuals:

• On disposal of a primary residence (owned and ordinarily resided in by taxpayer):

  • First R2 million of capital gain or loss is disregarded (example; confirm current threshold).
  • If proceeds ≤ R2 million and it was the only or main residence, entire gain may be disregarded.

Conditions:

• Land on which the residence is situated, up to 2 hectares, if used together with residence mainly for domestic purposes.
• Periods of absence and let-out use may reduce the available exclusion via apportionment.

Personal-use assets:

• Assets used mainly for non-trade personal purposes (e.g. personal car, household furniture).
• Capital gains and losses on personal-use assets for individuals and special trusts are generally disregarded.

Small business assets and roll-over relief:

• Relief may be available where small business owners (e.g. at least 55 years old) dispose of active business assets up to a certain threshold.
• Detailed rules may be part of ETAX3714 advanced sections; check syllabus.

4.4 CGT Calculation Steps (Exam Approach)

For an individual:

1. List all disposals in the year.
2. For each:
   • Determine proceeds.
   • Determine base cost.
   • Compute capital gain or loss.
3. Aggregate:
   • Sum all capital gains and losses.
   • Deduct capital losses from capital gains.
4. Apply annual exclusion for individuals (e.g. R40 000; verify current figure).
5. Result = Net capital gain.
6. Multiply by inclusion rate (e.g. 40%) to get taxable capital gain.
7. Add taxable capital gain to taxable income from other sources.

For companies:

• No annual exclusion.
• Inclusion rate typically 80%.

4.5 CGT Example: Individual (UFS ETAX3714 / UNISA TAX3701-Type Question)

Scenario:

Thandi, a South African resident individual, disposed of the following assets during the year ended 28 February 20X3:

1. Primary residence in Bloemfontein:

   • Purchased on 1 March 20X0 for R800 000.
   • Transfer costs and legal fees: R40 000.
   • Improvements (extra room): R160 000.
   • Sold on 1 October 20X2 for R3 200 000.
   • Used as primary residence throughout ownership, no business use.

2. Share portfolio in a JSE-listed company:

   • Bought on 1 March 20X1 for R100 000 (brokerage included).
   • Sold on 1 December 20X2 for R190 000 (after brokerage).

3. Personal motor vehicle:

   • Bought for R250 000 in 20X1, sold for R150 000 in 20X2.
   • Used solely for private purposes.

Assume:

• Annual CGT exclusion for individuals: R40 000 (example).
• Inclusion rate: 40%.

Step 1: Calculate individual gains/losses

1. Primary residence:

Base cost = 800 000 + 40 000 + 160 000
= R1 000 000

Proceeds = R3 200 000

Capital gain before primary residence exclusion:
= 3 200 000 – 1 000 000
= R2 200 000

Apply primary residence exclusion (R2 000 000):

Taxable capital gain for CGT computations:
= 2 200 000 – 2 000 000
= R200 000

2. Share portfolio:

Base cost = R100 000
Proceeds = R190 000
Gain = 190 000 – 100 000 = R90 000

3. Personal motor vehicle:

Personal-use asset for an individual.
CGT on such asset is disregarded (no gain or loss recognised for CGT).

Step 2: Aggregate capital gains and losses

Total capital gains:
= Primary residence (after exclusion) 200 000 + shares 90 000
= R290 000

No recognised capital losses.

Step 3: Apply annual exclusion

Annual exclusion: R40 000

Net capital gain after exclusion:
= 290 000 – 40 000
= R250 000

Step 4: Determine taxable capital gain

Taxable capital gain = 40% × 250 000 = R100 000

This R100 000 is added to Thandi’s taxable income in the income tax computation.

4.6 CGT Example: Company (ETAX3714 / TAX3702 Corporate Scenario)

Scenario:

Mangaung Tools (Pty) Ltd disposed of an industrial building:

• Cost (including transfer costs) on 1 March 20W0: R5 000 000.
• Tax allowances claimed to date under s13: R1 000 000 (building allowance).
• Adjusted cost / tax value: R4 000 000.
• Sold on 28 February 20X3 for R6 200 000.
• No roll-over relief available.

Step 1: Proceeds and base cost

Proceeds: R6 200 000

Base cost for CGT:
Original cost = R5 000 000
Less: allowances claimed (R1 000 000) generally reduce base cost for CGT (conceptually; exam may specify method).

Therefore, adjusted base cost = 5 000 000 – 1 000 000 = R4 000 000

Capital gain for CGT purposes:
= Proceeds – base cost
= 6 200 000 – 4 000 000
= R2 200 000

Additionally, recoupment of allowances (s8(4)):

• Tax allowances claimed (1 000 000) now recouped as revenue income (added to gross income).
• So there is R1 000 000 recoupment plus R1 200 000 pure capital gain (total CGT capital gain is 2 200 000, but full 1 000 000 is already taxed via recoupment).

Detailed treatment depends on exam instructions. Some syllabi split recoupment and capital gain; others treat base cost as tax cost before allowances.

For ETAX3714-level:

• Indicate recoupment under gross income: R1 000 000.
• CGT capital gain:
  Proceeds – (cost – allowances) = 6 200 000 – 4 000 000 = 2 200 000.
  Taxable portion = 80% × 2 200 000 = R1 760 000 added to taxable income.

Step 2: Corporate tax effect

Assuming corporate tax rate 27%:

• Normal tax on taxable capital gain of 1 760 000 = 27% × 1 760 000 = R475 ? Wait: 0.27 × 1 760 000 = R475 200.
• Plus tax on recoupment (1 000 000 × 27% = R270 000).
• Total tax impact: R745 200 on the disposal (excluding other income/expenses).

In exam solutions, clearly separate capital vs revenue elements.

5. Value-Added Tax (VAT) and Integrated Exam Application (ETAX3714 / CUT / UNISA Alignment)

5.1 VAT Framework: Vendors, Rates and Supplies

VAT in South Africa is governed by the VAT Act 89 of 1991.

Key concepts:

1. Vendor

   • A person registered or required to be registered for VAT.
   • Compulsory registration threshold: R1 million taxable supplies in any 12‑month period.
   • Voluntary registration allowed from R50 000 (or specified minimum) in 12 months.

2. Taxable supplies

   • Standard-rated (e.g. most goods and services).
   • Zero-rated (e.g. certain basic foodstuffs, exports).
   • Exempt supplies (e.g. financial services, certain educational services, residential rentals).

3. Rates

   • Standard rate: 15%.
   • Zero rate: 0% but supply remains taxable (input tax claimable).
   • Exempt: No output tax and no input tax may be claimed to the extent that expenditure relates to exempt supplies.

5.2 Output Tax vs Input Tax

Output tax:

• VAT charged on taxable supplies made by a vendor.
• Calculation: Output VAT = Value of supply × 15% (if standard-rated).

Input tax:

• VAT paid by vendor on purchases and expenses, to the extent that they relate to making taxable supplies.
• Input VAT can be claimed as a deduction against output tax.

Net VAT payable or refundable:

VAT payable = Total output tax – allowable input tax

Examples:

• Purchase of trading stock (standard-rated) ⇒ input tax claimable.
• Purchase of passenger vehicle for mixed or personal use ⇒ no input tax or only partial in specific circumstances.
• Entertainment expenses (e.g. staff meals in many cases) ⇒ input tax often denied.

5.3 Invoice Basis vs Payments Basis

Most vendors (including those in exam scenarios at UFS and UNISA) are on the invoice basis:

• Output tax declared when invoice is issued or payment is received, whichever happens first.
• Input tax claimed when invoice received and goods/services acquired, even if unpaid.

Small vendors may qualify for payments basis:

• Output tax and input tax accounted when payment is received or made.

In exams like ETAX3714 and CUT’s taxation papers:

• The question usually states “The company is registered for VAT on the invoice basis” unless otherwise indicated.

5.4 Common VAT Exam Scenarios

1. Determining if registration is required

   • Given revenue levels; compare to R1 million threshold.
   • Identify type of supplies (taxable vs exempt).

2. Calculating VAT payable for a period

   • List all taxable sales (standard-rated and zero-rated).
   • Calculate output VAT at 15% on standard-rated supplies.
   • List purchases/expenses with VAT (input VAT).
   • Adjust for private use, mixed use or disallowed input tax.
   • Compute net VAT.

3. Special adjustments

   • Bad debts: output VAT adjustments permitted when trade debt written off.
   • Change-in-use adjustments: if assets shifted from taxable use to exempt/personal, an output tax adjustment may arise.

5.5 VAT Example: Vendor in Trade (ETAX3714 / UNISA-Level)

Scenario:

Free State Stationers CC is a VAT-registered vendor on the invoice basis. For the VAT period 1 January to 28 February 20X3, the following transactions occurred (amounts VAT-exclusive unless stated):

1. Sales of stationery to customers (standard-rated): R460 000.
2. Export sales of books to a foreign school (qualifies for zero-rating): R80 000.
3. Purchase of trading stock from local suppliers (VAT-inclusive of 15%): R172 500.
4. Purchase of a delivery van (VAT-inclusive): R230 000. The van is used 80% for business deliveries and 20% privately by the owner.
5. Payment of salaries: R120 000.
6. Payment of office rent (VAT-exclusive): R40 000.
7. Entertainment expenses for staff year-end function (VAT-inclusive): R23 000.

Required: Calculate VAT payable or refundable for the period.

Step 1: Output tax

1. Sales – standard-rated: R460 000
   Output VAT = 15% × 460 000 = R69 000

2. Export sales (zero-rated): R80 000
   Output VAT = R0, but must be disclosed as zero-rated supplies.

Total output VAT = R69 000

Step 2: Input tax

3. Trading stock purchases, VAT-inclusive: R172 500
   To extract VAT (when amount is VAT-inclusive):
   VAT = 15/115 × 172 500
   = (15 ÷ 115) × 172 500
   = 0.13043478 × 172 500
   ≈ R22 500

   Input VAT allowed (used to make taxable supplies).

4. Delivery van, VAT-inclusive: R230 000
   VAT portion = 15/115 × 230 000
   = 0.13043478 × 230 000
   ≈ R30 000

   Van used 80% for business: input VAT claimable only to business-use extent.
   Business portion = 80% × 30 000 = R24 000.

5. Salaries: No VAT (not a taxable supply), no input VAT.

6. Office rent, VAT-exclusive: R40 000
   VAT charged = 15% × 40 000 = R6 000
   Input VAT = R6 000 (assuming fully for taxable activities).

7. Entertainment expenses, VAT-inclusive: R23 000
   VAT portion = 15/115 × 23 000
   ≈ R3 000
   Input VAT on entertainment for staff is generally denied, unless specific exceptions apply (e.g. canteen). Assume no input VAT allowed.

Total allowable input VAT:
= 22 500 + 24 000 + 6 000
= R52 500

Step 3: Net VAT payable

VAT payable = Output VAT – Input VAT
= 69 000 – 52 500
= R16 500 payable to SARS.

In ETAX3714 and UNISA exams:

• Marks are awarded for correctly separating zero-rated from standard-rated supplies.
• Excluding VAT on salary and exempt/denied items (like entertainment) is important for full credit.

5.6 Integrated Exam Application: Combining Income Tax, CGT and VAT

UFS ETAX3714 and comparable modules at CUT and UNISA increasingly present integrated questions. An example:

Scenario (Integrated):

• UFS Consultants (Pty) Ltd, a resident company, is a VAT-registered vendor on the invoice basis.
• During the year, it:
  • Earned consulting fees (standard-rated).
  • Bought computer equipment.
  • Disposed of an old server (capital asset) at a gain.
  • Paid dividends to shareholders.
• You are asked to:
  1. Calculate taxable income and normal tax payable.
  2. Compute VAT payable for the last VAT period.
  3. Determine any CGT implications on disposal of the server.
  4. Calculate dividends tax arising from the dividends paid.

To respond effectively:

1. Start with VAT:
   • Identify taxable supplies and related input tax.
2. Move to income tax:
   • Include revenue, recoupments, and capital gains (via CGT rules).
   • Deduct allowable expenses and capital allowances.
3. Address CGT in a sub-working:
   • Compute capital gain and taxable capital gain.
4. Deal with dividends tax last, as it is conceptually separate from normal tax.

This structured, multi-layered approach mirrors marking grids at UFS, UNISA and CUT, where separate markers often handle different parts of integrated questions.

6. Exam Technique, Common Pitfalls and Final Revision Strategy for ETAX3714

6.1 Question Reading and Planning

For long ETAX3714 questions:

1. Underline key dates and amounts.
2. Identify taxpayer type (resident/non-resident; individual/company/trust).
3. Mark law references in your head:
   • Gross income (s1).
   • Exempt income (s10).
   • Deductions (s11, s23).
   • CGT events (Eighth Schedule).
   • VAT (VAT Act sections).

Time management:

• Spend first 5–8 minutes reading Question 1 thoroughly.
• Split step-by-step tasks (e.g. “Firstly compute X’s taxable income excluding CGT; then compute CGT; then answer theory part”).

6.2 Layout and Presentation

Markers at UFS, UNISA and CUT all stress:

• Columnar workings – align income items on the left, deductions on the right, with sub-totals.
• Labels and brief reasons – e.g. “Exempt – s10(1)(i) interest exemption”.
• Legible figures – show all intermediate steps, not just final tax figure.

A good layout for individual taxable income:

1. Gross income
   • Employment income
   • Business income
   • Investment income
2. Less: Exempt income
3. Income
4. Less: Deductions
5. Add: Taxable capital gain
6. Taxable income

Then a separate working for:

• Normal tax: apply tax tables and rebates.
• Medical and other credits: MTC, AMTC.

6.3 Common Mistakes in ETAX3714 and Similar Modules

1. Not disclosing exempt income

   • For example, local dividends or exempt interest left out completely.
   • Solution: Always list under gross income, then explicitly deduct under “Exempt income”.

2. Confusing CGT annual exclusion with primary residence exclusion

   • Annual exclusion (e.g. R40 000) is applied after aggregating all gains/losses.
   • Primary residence exclusion (e.g. R2 million) is applied to each primary residence disposal.

3. Applying s11(a) deductions to non-trade expenses

   • Personal expenses are not trade-related.
   • Only home office or specific deductions are permitted under strict conditions.

4. Forgetting to add back accounting depreciation and replace it with tax allowances

   • Depreciation is never tax-deductible; must use wear-and-tear or special allowances.

5. Misclassifying VAT supplies

   • Confusing zero-rated with exempt (zero-rated still allows input VAT).
   • Claiming input VAT on exempt supplies-related expenses.

6. Ignoring residency implications

   • Treating a non-resident like a resident or vice versa.
   • Not limiting taxation to SA-source income for non-residents.

7. Not dealing with fringe benefits

   • Company cars, low-interest loans, subsidised accommodation – all have specific valuation rules (Seventh Schedule).
   • Many marks lost by simply omitting them.

6.4 Study Plan and Resources for UFS BAcc Students

1. Align with ETAX3714 curriculum documents

• Use UFS ETAX3714 study guide and tutorial letters as your primary reference.
• Cross-reference with:
  • Prescribed textbook.
  • SARS website for latest tax tables and rate changes.

2. Practise with UNISA and CUT-style questions

• Though codes differ (e.g. UNISA TAX3701, TAX3702, CUT TAX370), the content overlaps significantly.
• Additional question banks broaden your exam technique.

3. Build topic summaries

• After each topic (e.g. CGT, VAT, residence), summarise in:
  • One-page formula sheet.
  • Key section references.
  • One or two worked examples.

4. Simulate exam conditions

• Work through at least three full past ETAX3714 papers under timed conditions.
• Mark yourself using model answers if available.

5. Plan revision sequence

Suggested order in final 2–3 weeks:

1. Individuals and fringe benefits
2. Deductions, s11(a), specific allowances
3. Companies and assessed losses
4. CGT
5. VAT
6. Provisional tax and miscellaneous theory (ethics, anti-avoidance)

Revisit weak areas with targeted practice.

6.5 Bridging to Professional Studies and Other Universities

The content in ETAX3714 (UFS BAcc) aligns closely with:

• UNISA TAX3701 (Taxation – Individuals) and TAX3702 (Taxation – Companies).
• Similar modules at Central University of Technology (CUT) in their BAcc or BTech programmes.

Mastering ETAX3714 concepts prepares you for:

• Advanced undergraduate exams (e.g. following-year taxation modules).
• Honours/Postgraduate Diploma in Accounting (PGDA / CTA) taxation.
• Professional qualifying exams such as the SAICA ITC, SAIPA PQE, and IRBA APC.

Focus on:

• Understanding the logic of the tax system, not just rote memorisation.
• Applying statutory rules to new, unseen scenarios – the core of all tax exams across UFS, UNISA, CUT and other South African universities.

This ETAX3714 Taxation Exam Pack study guide for University of the Free State (UFS): BAcc consolidates the principal examinable areas—individuals, companies, CGT, VAT and exam technique—in a manner consistent with South African university taxation modules such as UNISA TAX3701/TAX3702 and similar courses at CUT. Combine it with past papers, updated SARS tables and your official ETAX3714 material to prepare thoroughly for your exams.